Weighted ACV vs ACV
Annual Contract Value (ACV) and Weighted Annual Contract Value represent two approaches to measuring contract-based revenue in SaaS businesses. ACV calculates the annualized revenue value of a customer contract, providing a standardized view of contract worth regardless of term length, making it easier to compare contracts of varying durations. Weighted ACV, as conceptualized by Nambdi Aregbulem, takes this a step further by incorporating probability factors into the calculation, typically based on sales pipeline stages, effectively discounting the potential revenue based on the likelihood of closing each deal, which provides a more realistic forecast of expected revenue rather than simply summing all potential deals at face value.
Consider a SaaS company with a sales pipeline containing numerous opportunities across different stages. Traditional ACV would be most appropriate when reporting actual closed business or when comparing the relative size of different customer contracts already secured. For example, if analyzing the company's current customer base to identify upsell opportunities, plain ACV clearly shows which accounts generate the most revenue. Conversely, Weighted ACV becomes invaluable during revenue forecasting and pipeline analysis, especially when reporting to investors or planning resources. If the company has $5 million in potential ACV spread across 20 opportunities at various stages, using Weighted ACV might reveal that the realistic expected value is closer to $2.1 million when accounting for the probability of winning each deal, providing a more conservative and accurate projection for financial planning.
Weighted ACV
Annual Contract Value
What is it?
Weighted Annual Contract Value (WACV) calculates the average contract dollar value with a weighted average proportional to the value of the contract. Essentially, higher value contracts are assigned more importance when calculating the total average contract value of a business. This approach is helpful to companies that have widely varying customer concentration by accurately calculating an ACV that is not skewed by contracts with low dollar value.
Annual Contract Value (ACV) is the dollar amount an average customer contract is worth to your company in one year. There tends to be less universal consensus on the definition of ACV compared to some other SaaS metrics, such as Annual Recurring Revenue. For example, some companies include one-time initial charges like setup or training in their ACV calculations, while others don’t.
Who is it for?
Categories
Formula
Example
Say you have three customers. Customer 1 has a contract value of $40,000 while the other two customers have a contract value of $5000 each. Adding up these numbers (40k + 5k + 5k), you get a total contract value of $50,000. You weighted ACV is calculated as follows: ($40,000 * ($40,000 / $50,000)) + ($5,000 * ($5,000 / $50,000)) + ($5,000 * ($5,000 / $50,000)). This gives you a WACV of $33,000. This is much more nuanced than the ~$17,000 you would get with the typical ACV metric.
You have 100 customers. 30 signed a 3-year contract with a contract value of $90,000, equivalent to $30,000 / year. 30 signed a 2-year contract with a contract value of $80,000, equivalent to $40,000 / year. 40 signed a 1-year contract with a contract value of $50,000, equivalent to $50,000 / year First Year Annual Contract Value = ( (30,000 x 30) + (40,000 x 30) + (50,000 x 40) ) / 100 customers Year 1 ACV = $41,000 Second Year Annual Contract Value = ( (30,000 x 30) + (40,000 x 30) ) / 60 customers Year 2 ACV = $35,000 Third Year Annual Contract Value = (30,000 x 30) / 30 customers Year 3 ACV = $30,000
Published and updated dates
Date created: Oct 12, 2022
Latest update: Mar 17, 2025
Date created: Oct 12, 2022
Latest update: Mar 31, 2023