SaaS ACV is one of those complex things that’s hard to really discuss, especially when you’re not a mathematician or a logistics expert specifically.
As a result, a lot of good SaaS designs and a lot of promising companies have failed utterly to actually properly budget their marketing campaigns and balance their overhead properly.
It doesn’t help that on top of this being complicated, SaaS ACV tracking and calculation is never really unanimously agreed upon by those businesses who do seem to know what they’re doing, which results in a combination of utter bafflement and clashing information for those on the outside looking in.
Demystifying this kind of thing is really not entirely possible either, so I find myself mildly remiss in addressing this issue all that well, not being a math guy first and foremost.
However, since this seems to be one of the more troublesome technical aspects of business and SaaS playing nice, we can try to take a look at what this is all about, and maybe find a simple way to get this right. It’s worth a shot at any rate.
Your ACV is your annual contract value, which really relates to two things which are mercifully not confusing in how they interrelate. Your overall contract value is how much, on average, your annual value of a given contract type across all customers of the period, sums up to be worth.
Along with this, on a per-customer basis both over periods of measurement and conceptually, you have how much these contracts are worth incidentally. So, what this actually is, is not that confusing, and it’s clear why you need this sort of metric.
Well, the problem comes from the fact that your ACV is actually the result of several smaller metrics, the primaries being your CAC (customer acquisition cost) and your LTV (lifetime value of a customer).
CAC is not hard to calculate, basically equating to the sum of all sales and marketing expenses divided by the number of new customers added.
That’s very simple, and the only real strategy needed here is knowing the time window for calculating this – weekly, monthly or yearly, though yearly is usually a safe bet.
LTV, however, is where it all goes bottom up quickly and nobody entirely agrees on how to best approach measuring this. The first thing you have to do is to define what a customer lifetime is, which isn’t that difficult, simply dividing the number one by the customer churn rate (which we discussed in previous pieces).
This will not give you a pretty number, so simply convert it to a percentage by shifting decimals.
Now, to calculate the lifetime value, you simply multiple your ARPA (average monthly recurring revenue per account) times the customer lifetime, which will give you a value per customer.
Now, with your CAC properly calculated and your LTV properly defined, these two numbers give you answers to both of your ACV values pretty directly.
Some take a step further with this and use inscrutable, complex equations with these two numbers to get a summary value, but understanding these equations, let alone explaining them, is something for a quantum physicist to attack, not a business person.
Really, if you have your CAC and your LTV properly define, then you have a good handle on your SaaS ACV, at least for the time being. As SaaS grows and the business grows more complex across the board for everyone, we will need a higher order of math beyond just these individual metrics, but that time is not now.