Stop Obsessing Over Average Contract Value (ACV)

Average Contract Value is important to know, but we’ve seen too many companies obsess over it as if it’s revenue or burn.  ACV is a vanity metric that should be treated with the same level of importance as retention, close ratio, sales cycle, leads, etc but don’t give it undue attention.  Here is why:


-Increases in ACV aren’t free.  Usually in order to increase ACV, it means some other metric of importance gets worse, for instance the sales cycle gets longer, the close ratio comes down, and the number of leads needed to complete a sale increases.  This makes sense because to get higher ACV’s, you have to focus on larger clients which inevitably means more layers of management to achieve an approval, more time required to identify the decision maker, more layers of bureaucracy to fight through, etc. 


-You can get very big focusing on smaller ACV’s, and companies that focus on smaller ACV’s tend to grow faster than those that focus on big ACV’s.  For instance, take Hubspot: their ACV from 2013 to 2015 was $7,752, $8,926, and $10,419.  They ended 2015 with 18,116 customers and LTM revenue is $190mm.  Clearly the market at a $10k ACV is huge and should not be overlooked just because you’re trying to achieve a $25k+ ACV.     


-Don’t try to force your customer base to be bigger.  $10k ACV is very achievable and we’ve seen many SaaS businesses focused on enterprise customers achieve the $10k ACV mark without hurting other key metrics.  When those same companies try to achieve $25k or even $20k of ACV, they realize it’s a materially different customer.  Asking someone to pay 2.0x to 2.5x more for a product (even if it’s more feature rich) generally puts you in a whole new bracket of customer with different needs.    


-Salesforce’s pricing should be looked at as the standard.  For enterprise customers, Salesforce has three packages: $65, $125, and $250 per user per month.  Salesforce’s most popular package is the $125 per user tier, so your product needs to be priced well within this tier, because many buyers will look to Salesforce as the cap: “why would we pay $X per user for that product when Salesforce is costing us $125 per user” is a common question any champion of your product will face.  To maximize growth, we find that ACV needs to be well within the $125 per user mark (perhaps 30% of it at most).


ACV is a metric that should be monitored, but don’t change the way you sell in order to artificially increase it.  While metrics like ACV are valuable, the real metrics you should be focused on are revenue and cash flow, and ACV is only one of many ways to impact both.   

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