If you run a SaaS company, you’ve probably been asked about your ARR and ACV. These two metrics sound similar, but they tell very different stories. Mixing them up can confuse investors, skew forecasts, and mislead your team.
Let’s walk through what each one means, how to calculate them, and when to use ARR vs ACV in practice.
What Is ARR?
Annual Recurring Revenue (ARR) is the total predictable subscription revenue your SaaS business generates in a year. It reflects your company’s recurring revenue engine and is often the headline number for investors.
Formula:
ARR = MRR × 12
Where MRR (Monthly Recurring Revenue) is your predictable monthly income from subscriptions.
👉 Example: If your SaaS earns $50,000 MRR, your ARR is $600,000.
📊 You can test this with our Annual Recurring Revenue Calculator.
What Is ACV?
Annual Contract Value (ACV) measures the average annual value of a single customer contract. It helps you understand deal size rather than total recurring revenue.
Formula:
ACV = Total Contract Value ÷ Contract Term (in years)
👉 Example: If a customer signs a 3-year deal worth $90,000, then ACV = $30,000.
This makes ACV more of a sales performance metric—useful for setting quotas, measuring deal quality, and segmenting customers.
ARR vs ACV: The Key Differences
| Metric | ARR | ACV |
|---|---|---|
| Definition | Total annual recurring revenue | Average annual value per contract |
| Focus | Entire company | Individual customer contracts |
| Audience | Investors, finance teams | Sales leaders, account managers |
| Use Case | Forecasting, valuation, growth tracking | Sales performance, pricing strategy |
| Formula | MRR × 12 | Total contract ÷ years |
👉 Think of it this way: ARR is the forest. ACV is the average height of the trees.
When to Use ARR vs ACV
- ARR → Use it when reporting company health, growth, and scalability. It shows the predictable revenue engine powering your SaaS.
- ACV → Use it when measuring sales effectiveness and deal quality. It helps answer, “Are we closing small monthly deals or big enterprise contracts?”
Together, ARR and ACV give you both scale and deal depth.
Real-World Scenarios
- High-volume, low-ACV SaaS (self-serve model)
- ARR matters most, since growth comes from volume.
- Example: $50 ACV × 20,000 users = strong ARR.
- Enterprise SaaS with high ACV deals
- ACV is crucial to track deal quality.
- Example: $100,000 ACV per customer can add ARR quickly with fewer logos.
How to Improve ARR and ACV
- Boost ARR by reducing churn, expanding contracts, and forecasting growth. Use the MRR and ARR Forecasting Calculator.
- Lift ACV by offering tiered pricing and upsells. Test scenarios with the SaaS Pricing Calculator.
- Protect both by improving retention. Model the impact with the SaaS Churn Reduction Calculator.
Even a small change in ACV or churn rate can have a massive impact on ARR.
Common Mistakes to Avoid
- Counting one-time revenue as ARR.
- Confusing bookings with ARR (they’re not the same).
- Using ACV as a growth metric instead of a sales efficiency metric.
- Ignoring churn when projecting ARR.
Clean, accurate reporting builds investor confidence and helps you make better decisions.
FAQs: ARR vs ACV
Q: Can ARR and ACV ever be the same?
A: No. ARR is total annual recurring revenue, while ACV is per-contract average.
Q: Should ACV include setup or one-time fees?
A: No. ACV should only reflect recurring contract value.
Q: Why do investors care more about ARR?
A: Because it reflects predictable growth across the entire business.
Q: How does churn impact ARR vs ACV?
A: Churn directly reduces ARR. ACV doesn’t change unless you’re closing smaller deals.