What is ACV vs. ARR?

ACV,​‍​‌‍​‍‌ or Annual Contract Value, represents the value of a contract (yearly per customer). ARR refers to Annual Recurring Revenue and captures all ongoing subscription revenues and churned subscriptions from the customer base. It is expressed at the company level.

Other differences between ACV and ARR:

•   ACV is taken only at deal closing or renewal.
•   ARR is a company-level picture continuously updated whenever subscriptions begin, expand, or are lost.

ACV and ARR differ in multi-year contracts: ACV distributes the total contract over its lifespan, and ARR is the annualized value.

As an example, A $300,000, 3-year contract could work out to:

ACV = $100,000 — the total value smoothed evenly across the 3-year term.

ARR = $100,000 — the current annualized run rate while the contract is active, not the full $300,000 deal value.

Certainly, which metric takes priority over the other is a matter of use or context:

• Sales compensation → ACV. ACV rewards are the total transaction size, which is what a sales team closes deals for.
• Investors and board communications → ARR. Company valuation is mostly based on ARR being the numerator multiplied by a multiple.
• Forecasting deal pipeline → ACV.
• CAC-payback planning and Run-rate planning → ARR. It presents the current state of the company’s recurring revenue.

In early stages, the presentation of entire contract values as ARR instead of their annual equivalent is sometimes observed.

For instance, a $900,000, 3-year contract might be documented as $900,000 ARR, which indicates three times its $300,000 annual value during the contract’s duration.

Additional examples of these elements are presented:

• Including a first-time set-up or one-off costs and then adding them into ARR
• Excluding specified reductions in the calculation of these two metrics
• Cancellations close to a deal’s expiration are not included in the evaluation

• Nuevo ARR — revenue from newly signed customers
• ARR de Expansión — revenue added from existing customers upgrading or buying more
• Reactivation ARR — revenue from customers who churned and came back
• Contraction ARR — refers to the portion of annual recurring revenue that reflects existing customers opting for lower service levels
• ARR cancelado — denotes the revenue value connected to customer relationships that have concluded

New + Expansion + Reactivation − Contraction − Churned = Net New ARR

Tracking each component separately, rather than just the net figure, lets a board or investor see whether growth is coming from new logos, expansion, or simply low churn.