ARR and ACV are the two metrics SaaS teams argue about most — and confuse most often. They sound similar, they both have "annual" in the name, and they both describe revenue from contracts. But they answer different questions, and using the wrong one for a decision leads to bad targets, bad forecasts and bad board meetings. This guide explains both, with the formulas, worked examples, and clear guidance on which metric to use when.
ARR: Annual Recurring Revenue
ARR is the value of your recurring revenue normalised to a year. It answers the question: "if nothing changed — no new sales, no churn, no upgrades — how much recurring revenue would we collect over the next twelve months?"
The formula:
ARR = MRR × 12
Where MRR (monthly recurring revenue) is the total of all active recurring subscriptions normalised to a monthly value. A customer paying £1,000/month contributes £12,000 to ARR. A customer paying £24,000/year contributes £24,000 to ARR (normalised: £2,000/month × 12).
What counts in ARR: recurring subscription revenue. What does not: one-off setup fees, professional services, hardware sales, or variable usage charges that are not committed. There is a related metric, by the way — CARR (contracted ARR), which includes committed but not-yet-started contracts. Useful for sales-heavy businesses; just be explicit about which one you are reporting.
ARR is the headline health metric of a SaaS business. It is what investors ask about, what valuations are multiples of, and what your growth rate is measured against. New ARR, churned ARR and expansion ARR tell the story of whether the business is actually growing or just running to stand still.
ACV: Annual Contract Value
ACV is the average annualised value of a contract, including everything the customer committed to. It answers a different question: "how big is this deal?"
The formula:
ACV = total contract value ÷ contract length in years
A three-year contract worth £90,000 has an ACV of £30,000. A one-year contract worth £30,000 also has an ACV of £30,000. Same ACV, very different contracts — which is exactly why ACV and ARR diverge.
Crucially, ACV typically includes one-off items that ARR excludes: setup fees, onboarding packages, and sometimes committed professional services. So ACV is usually higher than the ARR contribution of the same contract. A £30,000 ACV deal with a £5,000 setup fee contributes £25,000 to ARR but £30,000 to ACV.
ACV is a sales metric. It measures deal size, sales productivity and market positioning. "Our average ACV grew from £18k to £26k" means the sales team is landing bigger deals or selling upmarket — it says nothing directly about recurring revenue health.
ARR vs ACV: the key differences
- Scope: ARR covers the whole customer base (all active recurring revenue). ACV describes individual contracts or averages across deals.
- One-off revenue: Excluded from ARR; typically included in ACV.
- Time orientation: ARR is a snapshot of the business right now (annualised). ACV describes deals as signed, whatever their length.
- Owner: ARR belongs to the whole company — it is the business metric. ACV belongs primarily to sales — it is the deal metric.
- Churn: Reflected in ARR immediately (a cancelled £12k contract drops ARR by £12k). Invisible in ACV, which only ever looks at signed deals.
A worked example makes it concrete. Imagine a SaaS company signs one deal: a two-year contract worth £60,000, including a £10,000 onboarding fee. The ACV is £30,000 (£60k ÷ 2). The ARR contribution is £25,000 per year (£50k of subscription ÷ 2). Same contract, two numbers, two meanings: the deal the salesperson closed was £30k ACV; the recurring revenue the business gained was £25k ARR.
Which metric for which decision
Use ARR when: reporting company health to the board or investors; setting company-level growth targets; measuring net revenue retention; valuing the business; forecasting recurring revenue. ARR is the language of the business.
Use ACV when: setting sales targets and quotas; measuring sales rep productivity (ACV per rep); analysing deal-size trends and upmarket movement; comparing sales efficiency across segments; sizing the sales effort a deal deserves. ACV is the language of the sales floor.
Use both when: diagnosing growth problems. Rising ACV with flat ARR means you are signing bigger deals but churning or downgrading elsewhere — a classic pattern where sales celebrates and finance worries. Falling ACV with rising ARR can mean healthy land-and-expand motion: small initial deals growing over time.
The most useful combined view is the ARR bridge: starting ARR, plus new ARR, plus expansion ARR, minus churned ARR, minus contraction ARR, equals ending ARR. It turns two static numbers into the actual story of the period. Any SaaS leadership team should be able to draw theirs from memory.
Common mistakes
- Counting one-offs in ARR: Setup fees and services in ARR inflate the number and, worse, inflate growth rates — because one-offs do not repeat. Keep ARR pure recurring; report one-offs separately.
- Mixing booked and live: Counting signed-but-not-started contracts in ARR flatters the number. Either use CARR explicitly or count revenue only when it starts. Be consistent and say which you do.
- ACV without contract length context: "Average ACV £30k" means little without knowing whether deals are one-year or three-year. Longer contracts at the same ACV are better business — report both.
- Vanity ACV growth: ACV rising because of bigger one-off services components, not bigger subscriptions, is not upmarket movement — it is a services business wearing a SaaS costume. Check the subscription component specifically.
- Ignoring the ratio: Track ACV against customer acquisition cost. If ACV is £20k and fully-loaded CAC is £25k, you have a sales efficiency problem no amount of ARR growth will fix.
A note for founders building SaaS
If you are building a SaaS product, instrument these metrics from the start. Retrofitting ARR calculations onto messy billing data is one of the most painful finance exercises a startup goes through — and investors will ask for the numbers in exactly the format described here. Your billing system should be able to produce MRR/ARR, churn, expansion and contraction as standard reports, not spreadsheet archaeology.
Getting the data model right early — subscriptions, contracts, one-offs and discounts as distinct entities — saves months of pain later. It is one of those unglamorous architectural decisions that compounds. Our application development team builds SaaS platforms with this kind of operational reporting designed in from day one, not bolted on before a funding round.
For the broader build-vs-buy question that every SaaS founder faces early on, see our comparison of custom versus off-the-shelf software.
FAQs
What is the difference between ARR and ACV in simple terms?
ARR is the annualised value of all your recurring revenue right now — the health of the business. ACV is the annualised value of a single contract including one-offs — the size of the deal. ARR tells you how the company is doing; ACV tells you how sales is doing.
Should one-off fees be included in ARR?
No. ARR should be pure recurring revenue — subscriptions and committed recurring charges only. One-off setup fees, onboarding and professional services belong in ACV and in separate revenue reporting. Mixing them inflates ARR and distorts growth rates, since one-offs do not repeat.
Can ACV be higher than ARR for the same contract?
Yes, and it usually is. A contract with setup fees or onboarding charges will have an ACV above its ARR contribution, because ACV includes the one-offs and ARR excludes them. This is normal — just do not confuse the two when forecasting recurring revenue.
Which metric do investors care about?
ARR, overwhelmingly — plus ARR growth rate and net revenue retention. ACV matters to investors mainly as context: it signals market positioning (upmarket vs volume) and feeds into sales efficiency analysis. In a pitch deck, lead with ARR; keep ACV for the go-to-market slides.
How do we track these accurately as we scale?
Make your billing system the source of truth with subscriptions, contracts, one-offs and discounts modelled as distinct entities — not spreadsheet adjustments after the fact. Review the ARR bridge monthly and reconcile it to recognised revenue. If you are building a SaaS product and want the metrics architecture done properly from the start, talk to us.
