Average Contract Value is an important metric in SaaS. If it’s trending up and to the right, it’s a sign that customers are upgrading more than they’re downgrading, the base is getting more “enterprisey”, and you’re really focusing on the ideal customer. However, the last 73 SaaS companies to IPO had a modest median ACV of $49,263, which shows you don’t have to get to six figure contracts to build a great SaaS business. A few observations:
Bigger software companies have smaller ACV’s. To do the analysis, we looked at each companies’ annual revenue relative to the number of customers prior to IPO (all contained in a filing called an S1). Upon going public, the median ACV was only $49,263. This makes sense as the universe of clients that can afford a lower ACV is much higher than those that can afford a $100,000+ ACV. By focusing on a moderate ACV of $25k to $50k, you’ll be going after a larger market and have the opportunity to be a bigger, IPO worthy company.
Increases in ACV aren’t free. 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, churn can increase, and the number of leads needed to complete a sale increases. Enterprise customers have more layers of management to achieve an approval, more time required to identify the decision maker, and more bureaucracy. It’s not uncommon to see sales cycles of 4 to 6 months for ACV’s over $20k and 6 to 9 months when ACV’s get to $100k+.
The trend is more important. The trend of your ACV (whether it is rising or falling) is more important than the actual dollar amount. Make sure the trend is moving towards your ICP (ideal customer profile).
ACV is a metric that should be monitored, but don’t change the way you sell in order to artificially increase it. Rather, focus on generating the most revenue you can as cash efficiently as possible. Make sure you’re selling to the ICP and retaining and upselling the customer
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