What is average contract value?
Average contract value (ACV) is a crucial financial metric that helps you measure the average revenue each deal or contract brings in. It’s a straightforward, but powerful tool that gives you insight into the financial value of your sales efforts.
Calculating your average contract value is simple. Divide the total revenue earned from a set number of contracts by the total number of contracts. For example, if your partners sold $100,0000 in software licenses from 20 deals, your ACV would be $5,000.
Average contract value calculation = Total revenue earned / Total # of contracts
Here’s why you should care about this key financial metric:
- Profitability: Identify what types of contracts are most profitable, enabling you to better focus your sales strategy
- Forecasting: Forecast future potential revenue, assuming ACV remains consistent
- Efficiency: This metric is an excellent way to measure the effectiveness of your sales team and sales strategies
- Target setting: Lastly, ACV can be a guide for setting realistic sales targets, based on historical sales data
Keeping an eye on your average contract value can provide insights that can guide your decision-making, and ultimately, drive your business growth.