Difference Between ACV and ARR: Understanding the Differences for SaaS Financial Planning

In 2019, a SaaS company’s board meeting went popular on LinkedIn because it was so open. The CEO said that their Annual Contract Value (ACV) was going up, but their Annual Recurring Revenue (ARR) was staying the same. Investors were scared. How is this possible? The answer lies in knowing the difference between ACV and ARR, two important measures that SaaS companies use to plan their finances and make predictions.

People often get these two measures mixed up, but they are used for very different things when trying to figure out how healthy a business’s finances are. Let us look at how they are different and why it’s important for every SaaS leader to understand both.

What does ACV mean?

Annual Contract Value (ACV) is a way to figure out how much money a customer usually brings in over the course of a year. This is very useful for multi-year contracts since it divides the total value of the deal into annual payments. If a client signs a $150,000 deal for three years, the ACV is $50,000.

When to Use It: ACV helps SaaS companies figure out how each contract affects their finances, figure out how much new deals are worth, and look at their methods for dividing customers into groups.

Why It’s Important: By keeping track of ACV, businesses can see how well their sales team is doing and see if they’re making more valuable deals over time.

What does ARR mean?

Annual regular Revenue, or ARR, is the steady income that a SaaS business gets each year from subscriptions or regular billing. It doesn’t include one-time fees, setup costs, or charges that don’t happen again and again.

When to Use It: ARR is important for figuring out how your business will make money and stay in business in the long run.

The amount of recurring revenue (ARR) you have is a key indicator for investors and operational planning because it shows how healthy your recurring income streams are.

What’s the Difference Is Between ACV and ARR?

The main difference between ACV and ARR is how they are used and what they cover:

ACV looks at individual customer contracts and gives a detailed picture of how much money is coming in.

ARR adds up all of a company’s recurring income, which gives a more complete picture of its financial health.

Use Cases:

The best ways to use ACV are for sales and user segmentation.

ARR is better for planning for the long run and making financial predictions.

How it Affects Decision-Making:

If you only look at ACV, you might miss problems like customers leaving or downgrades.

ARR takes these small details into account, which makes net growth easier to understand.

For instance, a company might be excited about getting $1 million in new contracts with a high ACV, only to find that their ARR stays the same because so many customers are leaving. This shows how important it is to know the difference between ACV and ARR for good financial planning.

How the Metrics Work: Real-Life Examples

Scenario 1: Review of the Sales Team

By keeping track of the average size of their deals, ACV can help you judge how well each sales person is doing. Are they going after big customers or smaller deals that can be closed faster?

Situation 2: Predicting sales

When you’re planning for growth or getting ready for funding rounds, ARR is a must. ARR is often the most important number for investors because it shows recurring, steady income.

Case 3: Managing Employee Turnover

When the ACV is high and the ARR is going down, it usually means that customers are signing big contracts but then leaving soon after. This could show problems with your goods or the way your customers are experiencing it.

Why the Difference Between ACV and ARR Is Important for Planning Your SaaS Budget

It’s not enough to just crunch numbers to understand these measures. It’s about making better choices based on facts. What the difference between ACV and ARR means for:

How to Set Prices: A high ACV could mean that there are chances to upsell or add higher levels.

Plans to keep customers: ARR trends can show you when to focus on customer success programs.

Market Expansion: If your ACV is going up but your ARR isn’t, it might be time to change how you add new customers or look for new ways to reach new customers.

Getting your teams to work together on both measures will help you make a complete financial plan that supports long-term growth.

What HubSpot Can Do to Help You Track and Improve ACV and ARR

The set of tools from HubSpot gives you the clarity you need to handle both ACV and ARR well. HubSpot lets SaaS companies: Visualise Data Trends: With its powerful tools, customisable reports, and ability to connect to other systems, You can make smart choices by seeing ACV and ARR in real time.

Keep track of the customer lifecycle: Keep an eye on the whole customer journey to spot risks of customer loss or chances to sell more.

Improve your sales pipelines: Use ideas from data to raise the value of contracts and boost the number of wins.

SaaS companies can close the gap between ACV and ARR by using HubSpot’s features. This makes sure that growth is both scalable and long-lasting.

Let HubSpot Help You Take the Next Step

Are you ready to take charge of your SaaS business metrics? To see how our tools can change the way you handle ACV and ARR, book a demo with Ale, our HubSpot expert. Learn how to plan based on data, and you can confidently move your SaaS business forward.

Drop us a line here, and let’s understand how we can help you.