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    How do you measure the true value of each deal your sales team closes? Average Contract Value (ACV) is a key metric that helps businesses understand revenue potential, optimize sales incentives, and improve sales performance.

    Despite its importance, 65% of B2B companies do not effectively track ACV, which can lead to misaligned compensation structures and lost revenue opportunities (Forrester). Yet, many companies fail to integrate ACV into their compensation and quota structures, leading to revenue inefficiencies and unaligned sales efforts.

    This guide will break down how ACV impacts sales compensation, how to calculate it, and how to use it to drive business growth.

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    What Is Average Contract Value?

    Average Contract Value (ACV) is the average revenue per contract over a specific period, usually a year. It helps businesses analyze deal sizes, sales performance, and compensation plans to ensure their sales efforts align with revenue goals.

    How to Calculate ACV

    Use the following formula:

    ACV = Total Contract Revenue / Contract Duration (in years)

    For example, if a company signs a three-year contract worth $90,000:

    ACV = $90,000 / 3 = $30,000

    In a subscription-based business, if a SaaS company charges $2,000 per month and has a 24-month contract, ACV is:

    ACV = ($2,000 Ă— 24) / 2 = $24,000

    ACV gives insight into sales strategies, pricing models, and sales team performance.

    ACV vs. ARR: Understanding the Difference

    Many companies confuse Average Contract Value (ACV) and Annual Recurring Revenue (ARR).

    • ACV measures the average contract size over time.
    • ARR calculates the total revenue from all active contracts per year.

    For example, if a SaaS company has 100 customers, each with an ACV of $10,000, its ARR would be $1,000,000.

    Why does this matter? ACV is crucial for sales compensation because it defines deal size, while ARR is more relevant for forecasting and investor reporting.

    Why ACV Matters in Sales Compensation

    ACV plays a vital role in structuring compensation plans and setting OTE (On-Target Earnings). Here’s why:

    1. Defines Realistic Sales Quotas

    A higher ACV means fewer deals are needed to hit quotas, while a lower ACV requires higher deal volume. Companies need ACV insights to set achievable quotas for their sales reps.

    2. Optimizes Sales Incentives

    Sales teams motivated by commission structures need ACV-based incentives that align with revenue growth. A higher ACV means bigger commissions, making high-value contracts more attractive.

    3. Affects Compensation and OTE

    OTE (On-Target Earnings) is a key metric in sales compensation. If ACV is too low, sales reps may struggle to reach OTE, leading to dissatisfaction and turnover.

    4. Helps with Sales Forecasting

    Knowing ACV helps finance and sales leaders predict revenue more accurately. A company with a stable ACV can create better compensation and quota plans that align with business goals.

    Companies that track ACV properly see a 20% improvement in revenue forecasting accuracy, reducing the risk of overpaying or underpaying commissions (Gartner).

    5. Influences Sales Strategies

    If a company wants to increase ACV, sales strategies should focus on:

    • Cross-selling and upselling
    • Enterprise-level customers
    • Longer contract terms

    A higher ACV drives higher commissions and improves sales team motivation.

    The best way to achieve all of that is by implementing a sales compensation management software. Give your teams a tool that simulates their incentive plans with scenarios to visualize their projected earnings and transparently understand their compensation plan.

    How to Increase Average Contract Value

    Businesses looking to maximize revenue and optimize compensation plans should focus on increasing ACV.

    1. Upsell and Cross-Sell to Existing Customers

    Encouraging customers to buy premium plans, add-ons, or related services increases contract value. Sales teams should:

    • Sell higher-tier products
    • Offer bundled services
    • Incentivize customers to expand their usage

    đź“– Read Newcop’s succes case to discover how they increased the selling of cros-sellin.

    2. Offer Longer Contract Durations

    Companies that offer multi-year contracts create higher ACV and greater revenue predictability.

    3. Target High-Value Customers

    A SaaS company targeting enterprise clients will naturally achieve a higher ACV than one focusing on small businesses.

    4. Reduce Churn Rate

    A high churn rate lowers total revenue. Reducing churn by improving customer retention results in a higher ACV over time.

    5. Adjust Sales Incentives to Focus on ACV

    If reps earn commissions based on contract value, they are more likely to pursue high-ACV deals rather than high-volume, low-value contracts.

    With Remuner you can manage all these compensation scenarios and much more. Design gamified incentive plans with challenges, rankings and cross-selling incentives, boost your business now!

    Examples of ACV in Different Business Models

    1. SaaS Company with Monthly Subscriptions

    A software company offers a $1,000 per month subscription, and the average customer stays for 24 months.

    • ACV = ($1,000 Ă— 24) / 2 = $12,000

    2. Enterprise Software Provider

    An enterprise software company sells $250,000 contracts with a 5-year commitment.

    • ACV = $250,000 / 5 = $50,000

    3. Digital Marketing Agency

    A marketing agency charges clients $5,000 per month, with an average contract length of 18 months.

    • ACV = ($5,000 Ă— 18) / 1.5 = $30,000

    How Remuner Helps Optimize ACV-Based Compensation

    Companies looking to integrate ACV into their compensation strategies can benefit from Remuner’s sales compensation platform.

    With Remuner, you can:

    • Automate commission tracking for ACV-based deals
    • Optimize quota setting based on ACV trends
    • Analyze performance metrics to refine sales incentives

    Businesses using Remuner have reported higher ACV and improved revenue efficiency through data-driven compensation plans.

    Final Thoughts

    Average Contract Value is a key metric in designing effective sales compensation plans. By incorporating ACV into quotas, commissions, and revenue strategies, businesses can maximize sales incentives and overall revenue growth.

    To optimize ACV-based compensation, explore Remuner’s solutions and see how automation can transform your sales strategy.

    FAQs About Average Contract Value

    How does ACV impact sales compensation?

    ACV determines quota setting, commissions, and OTE. Companies with higher ACV can pay higher commissions, while low-ACV businesses need volume-based incentives.

    How do you calculate ACV for monthly subscriptions?

    Multiply the monthly contract value by the average contract length in months.

    What is the difference between ACV and ARR?

    ACV measures average contract size, while ARR tracks total annual revenue from active contracts.

    How can businesses increase ACV?

    By upselling, cross-selling, reducing churn, and targeting larger deals.

    Why is ACV important for SaaS companies?

    ACV helps SaaS businesses forecast revenue, structure compensation, and align sales incentives.