ACV vs ARR vs TCV: What they mean, how to use them, and why they matter

Not all revenue is equal.

You might close a $180K deal that looks huge — until you realize it’s spread over 3 years, includes hefty one-time fees, and contributes far less to your annual plan than it seems.

Annual Contract Value (ACV) gives you a clean, normalized way to track what each contract is really worth — per year, per account. And for finance teams building models and making forecasts, that clarity is non-negotiable.

What is ACV — and why is it useful?

ACV measures the average annualized revenue from a contract, excluding one-time fees like onboarding or implementation.

It’s most useful when:

• Your deals vary in length
• You’re comparing contract value across customers
• You need a consistent way to measure rep performance
• You’re modeling revenue growth or burn

Think of ACV as a translation layer. It strips out timeframes, fees, and complexity — so you can compare deals and project revenue with fewer assumptions.

Note: Some companies include one-time fees in ACV; others don’t. Confirm your methodology, and stay consistent (source).

How to calculate Annual Contract Value (ACV)

The formula is simple:

ACV = Total contract value / contract term (in years)

Example:

• A 3-year contract worth $180K = $60K ACV
• A 1-year contract worth $60K = $60K ACV
• Both contribute the same annual value, even if one’s longer.

When calculating ACV, remember to:

• Exclude one-time fees like setup or implementation costs
• Include all recurring revenue components
• Normalize contracts of different lengths to an annual value

This standardization allows you to compare contracts of varying durations on equal footing.

ACV vs ARR vs TCV: What’s the difference?

Here’s a clean breakdown:

• ACV focuses on annual revenue from a single contract
• TCV considers the total revenue generated over the entire contract term — all years included — from a single contract
• ARR (Annual Recurring Revenue) measures the annual revenue from all subscription-based contracts

Time Horizon

• ACV normalizes to a one-year period
• ARR shows your recurring revenue at an annual rate
• TCV captures the full lifetime value of contracts regardless of duration

When to Use Each

• Use ACV when analyzing average deal size or comparing sales performance
• Use ARR when forecasting predictable revenue or reporting on business health
• Use TCV when evaluating total contract commitments or cash flow implications

Understanding these differences helps you choose the right metric for your specific analysis needs.

Why ACV matters in forecasting

When you’re modeling future revenue, planning headcount, or tracking runway, ACV helps you anchor your assumptions in reality:

• You can compare deals on equal footing
• You can run scenarios based on average ACV per rep
• You can tie pipeline to likely cash inflows with fewer manual adjustments

Use Runway's intuitive modeling to build ACV-driven scenarios, and see runway impact in seconds. This helps you make faster, more informed decisions about your company's financial future.

How to improve your ACV

You don’t have to overhaul your GTM motion to raise ACV. But you do need to be intentional. Here’s what works:

Sell deeper, not just wider

Train your team to upsell value, not just volume. That means:

• Creating premium bundles or tiered offerings
• Tying pricing to outcomes, not headcount
• Incentivizing multi-year commitments with step-ups

Target the right customers

Not every customer needs to be enterprise. But if your marketing and sales strategies are aligned around low-ACV segments, your forecast will stay shallow — no matter how strong your close rate is.

Use ACV data to spot ideal customer profiles and refocus your outreach.

Use ACV in team planning

Don’t just report ACV. Build with it.

In Runway, you can:

• Forecast bookings by ACV segment
• Track rep performance tied to expansion ACV
• Align GTM hiring plans with ACV-driven revenue goals

That means less hand-waving in planning meetings — and clearer paths to sustainable growth.

ACV tells you what each contract is really worth — every year. It gives you a clean, comparable, no-nonsense view of how your business is growing.

And when you're making decisions about hiring, pricing, sales targets, or runway — that's exactly what you need.

See how Runway models ACV in real time.