ACV vs. ARR: Understanding Their Impact on SaaS Financial Planning

Annual Contract Value (ACV) and Annual Recurring Revenue (ARR) are the two of the most important financial metrics that SaaS companies use to measure their performance and predict future revenue. 

ACV and ARR may look a lot alike, but there is a big difference between them that can have a big effect on how businesses plan their finances and grow.

A recent study by SaaS Capital is interesting because it shows that the average SaaS company can grow up to 25% faster when they really understand these metrics. This emphasizes the significance of SaaS companies not only monitoring these two metrics but also comprehending their impact on their financial decisions. Each has a role to play in SaaS financial planning.

What does ACV mean?

ACV stands for “Annual Contract Value,” which is the value of a customer’s contract over a year. Based on the terms of their subscription, this metric shows how much money a SaaS company thinks a certain customer will bring in each year. It helps companies figure out how much money each customer brings in on average every year, excluding one-time fees or discounts. If a customer signs a $30,000 contract for three years, the ACV for that customer is $10,000 per year. 

ACV is most useful for businesses that sell multi-year contracts or high-value subscription plans because it lets them figure out how much each customer contract is worth.What does ARR mean?An alternative term for this is “Annual Recurring Revenue.” This refers to the steady, yearly money that all of a SaaS company’s customers give it. ACV looks at individual contracts, while ARR looks at how much recurring revenue all of the company’s customers’ subscriptions bring in.

This metric is important for planning your finances and can help a business guess how much money it will make next year based on how many customers it keeps and how many subscriptions it gets. ARR doesn’t include one-time fees or setup costs because they aren’t recurring revenue. This gives a clear picture of the business’s ongoing revenue stream. This is especially important for SaaS companies that depend on subscriptions to keep their cash flow steady.

What makes ACV and ARR different?

Both ACV and ARR are useful metrics for SaaS businesses, but it’s important to know the difference between them when planning your finances. The main difference is what each metric measures and how it is measured.

Scope of Measurement: ACV looks at the value of each customer contract, while ARR looks at the total recurring revenue from all customers.

Time Frame: ACV figures out how much a customer’s subscription is worth over the course of a year, while ARR gives a more complete picture of the business’s recurring income, usually over a number of years.

Use Case: ACV is a useful way to figure out how much long-term contracts are worth, especially when looking at big clients or deals that last more than one year. ARR, on the other hand, is important for figuring out how well a business can make money year after year.

How to Use ACV and ARR to Plan Your SaaS Budget

SaaS companies need to know both ACV and ARR in order to make successful financial plans and accurate predictions. 

These metrics show a business’s revenue-generating strategy from various angles, which helps them make smart choices about growth, pricing, and keeping customers.

Predicting sales and planning for growth ARR shows how well a SaaS company is doing financially because it gives a clear picture of recurring revenue. Companies can guess how much money they will make in the future and better plan for growth if they keep track of ARR.

This is crucial for SaaS companies that depend on subscription renewals because it helps them figure out how many customers will leave and how much it will cost to get new ones. ACV, on the other hand, can be very useful for figuring out how different contracts affect the company’s overall income.

Tracking ACV can help SaaS companies that focus on big contracts or enterprise clients find their most valuable customers and figure out how much money they could make in the coming years. Keep customers and sell to them more.

ACV is a key metric for understanding how to keep customers and get new ones, while ARR is important for looking at the overall revenue base. Businesses can find trends in how much customers spend and get chances to upsell or cross-sell extra services by looking at the value of each individual contract. An example of this would be if a customer’s Average Customer Value (ACV) consistently increases over time. This could mean that the business is growing its relationship with that customer.

Taking care of cash flow

Many SaaS companies worry a lot about their cash flow, and both ACV and ARR can help with this part of their financial planning. ARR helps companies figure out how much money they will make in the future, so they can make sure they have enough money to cover their costs. On the other hand, ACV can help determine when large payments from customers are due, which is essential for cash flow management and liquidity planning.

How ACV vs. ARR Affects Business Decision-Making

One cannot overstate the influence of ACV and ARR on business decisions. Both metrics play a key role in guiding decisions about pricing, marketing, customer acquisition, and overall business strategy.

Pricing Strategy: Companies that track ACV may choose to offer higher-value contracts to larger customers in order to boost their ACV. Meanwhile, businesses focused on increasing ARR may look for ways to expand their customer base through lower-priced, recurring subscription plans.

Marketing and Sales Focus: Understanding the difference between ACV and ARR can help businesses tailor their marketing and sales efforts. Companies with a high ACV might focus on targeting high-value, long-term clients, while those focused on ARR may place more emphasis on customer retention and upselling existing customers.

How HubSpot Can Help

As we’ve discussed, understanding ACV and ARR is vital for effective financial planning.

This is where HubSpot can make a significant difference. With HubSpot’s suite of CRM and sales tools, SaaS businesses can track key metrics, such as ACV and ARR, in real time, giving them the insights they need to make data-driven decisions.  HubSpot allows businesses to gain a deeper understanding of their customer base, track contract values, and monitor recurring revenue over time.Furthermore, HubSpot’s powerful reporting tools enable SaaS companies to visualize trends in their ACVs and ARRs, making it easier to spot areas for growth and potential risks. 

HubSpot integrates seamlessly with your existing systems, providing a central platform for managing customer relationships and financial planning.If you’re looking to optimize your SaaS financial planning and leverage the power of data, Ale, our HubSpot specialist, can give you a personalized demo of how HubSpot can streamline your processes and drive growth.  Don’t miss out on the opportunity to optimize your financial strategy—schedule your HubSpot demo today! Book a call here.