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SaaS Busters: ACV (Annual Contract Value) vs ARR (Annual Recurring Revenue)

Republished by Plato

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After commenting on a post by SaaSMetrics, I realized how much confusion and mixed definitions there are on the difference between ACV (Annual Contract Value) and ARR (Annual Recurring Revenue), which prompted me to think — “I need to research this a bit more”. I want to breakdown my explanation and findings, and define where confusion currently exists.

First let me start by saying ACV tracking and calculation is never really unanimously agreed upon, even by major SaaS businesses who do seem to know what they’re doing. This causes some pretty serious confusion. However you calculate it, whether how I suggest, or in your own way, that your company is all on the same page with how you are measuring ACV. I will answer your questions and give you examples as to why you, and all of us, are probably confused.

Annual Contract Value (ACV) Definition

Annual contract value (ACV) is an average annual contract value of your account subscription agreements. For companies that also charge one-time fees in conjunction with recurring fees, the first-year ACV might be higher than later-year ACVs in a multi-year contract. This is how I would define it at least.

Annual Recurring Revenue (ARR) Definition

Annual recurring revenue (ARR) is much less confusing and is typically agreed upon. I will grab the definition from Zuora for us. ARR is the value of recurring revenue of a business’s term subscriptions normalized to a single calendar year. What does that look like on paper? Let’s say Jack purchases a four-year business service subscription from Jill for $20,000. If we normalize the full-term revenue to a single year, our ARR would be $5,000 because that is the yearly income on that subscription.

ACV vs ARR Customer Example

Here is an example of ACV vs ARR calculated with 3 example customers, which we will use to explain the differences of both:

Customer A

Customer A agrees to a $1000 / year, 1 year agreement, and pays monthly.

Metrics calculated for Customer A Only:

  • ARR = $1000
  • ACV = $1000

Customer B

Customer B agrees to a $750 / year, 2 year agreement, and pays yearly.

Metrics calculated for Customer B Only:

  • ARR = $750
  • ACV = $750

Customer C

Customer C agrees to a $500 / year, 3 year agreement, and pays yearly.

Metrics calculated for Customer C Only:

  • ARR = $500
  • ACV = $500

——————–

Metrics calculated with all three customers A, B & C combined:

  • ARR = $2,250
  • ACV =
    • Year 1 = $750
    • Year 2 = $625
    • Year 3 = $500

——————–

Here are the calculations broken down:

  • ARR: $1000 + $750 + $500 = $2,250
  • ACV:
    • Year 1: $1000 + $750 + $500 / 3 = $750
    • Year 2: $750 + $500 / 2 = $625
    • Year 3: $500 / 1 = $500 

ACV-vs-ARR-Example-Summary-Sheet

What Does This Mean?

So as we can see from my definition, ACV is how much, ON AVERAGE, your annual value of a given contract type across all customers of the period is worth. This is the primary difference between ACV and ARR. If you were to add the contract values to calculate ACV then it would come out to the same outcome ($2,250) as ARR just with a different way of getting there.

Let’s take HubSpot’s ACV as an example, it is around $6,000 – $10,000 (just a guess based on this Quora post). It would be much higher if you were to add all of the signed committed agreements for the year, let’s say 1000 contracts x $10,000 = $10M, quite a difference.

ACV Bookings

ACV Bookings however, refers to the total value of accepted term contracts. This means you would add them together vs average them. ACV Bookings are only calculated for 1 year vs multi-year. For beyond one year, TCV (Total Contract Value) comes into play.

TCV (Total Contract Value)

TCV (Total Contract Value) is calculated to see total values of multi-year contracts (this could be yearly contracts or subscriptions that have a termination period, but ongoing subscriptions with no defined end are not included). In our previous example here is how TCV would breakdown:

  • Customer A TCV = $1,000
  • Customer B TCV = $1,500
  • Customer C TCV = $1,500

TCV of Customer A,B and C combined = $4,000

Adding in Implementation Fees, Onboarding Fees, Training, etc.

There are quite a few ways to spin this and it depends on how you package your agreements, how granular you want to get, and ultimately what works best for your business. In my opinion, to simplify, I would associate all fees within a contract as part of the final agreement, given they are a part of the agreement. In the examples above you could simply have calculated one-time fees, onboarding fees, and training included within the numbers for the same outcome.

For example:

  • Customer A agrees to a $1000 / year, 1 year agreement and pays monthly, which includes onboarding fees.
  • Customer B agrees to a $750 / year, 2 year agreement and pays yearly, which includes an implementation fee and training fee.
  • Customer C agrees to a $500 / year, 3 year agreement and pays yearly, which includes onboarding fees and implementation fees.

At the end of the day this would give you a healthy understanding of your ACV and if you wanted to you could always dig in deeper and get more granular by separating calculations later.

ACV Calculated with Expansion Revenue & Churn

To truly calculate ACV more accurately you would want to include Expansion Revenue and Churn.

ACV = New Customers + Expansion or Existing Customers – Churned Customers.

There is a great breakdown of this on For Entrepreneurs where you can read more about this.

Why ACV Might Confuse You

Here are the reasons for your confusion. I may be wrong, but I have researched this a lot and trust me there is confusion everywhere within this subject, but these are my conclusions.

1. ACV vs ACV Bookings – ACV alone is used as an average to understand the average value of your contracts. This is why I look at the following years also. Where as ACV bookings is generally used as a total of your contracts for a 1 year period. When using ACV bookings for a 1 year period you will also see TCV bookings calculated to total multi-year contracts. Sometimes ACV and ACV Bookings are used interchangeably, which in my opinion they should not as they are two separate calculations.

2. Most of the time when calculating ACV people only give an example for 1 customer, which then leads the person to wonder, do I add my customers together or average them to get my calculation?

3. If I would have stated that the agreements were not per year, and instead:

  • Customer A was a $1000 agreement for 1 year
  • Customer B was a $750 (total, not yearly) agreement for 2 years
  • Customer C was $500 (total, not yearly) agreement for 3 years

Then the calculations would calculate differently like this:

Year 1:

  • Customer A: $1000 / 1 year = $1000
  • Customer B: $750 / 2 years = $375
  • Customer C: $500 / 3 years = $166.67

Divide by 3 to average them.

$1000 + $375 + $166.67 / 3

Year 1 ACV = $513.89

——————–

Year 2:

  • Customer A: Not Included
  • Customer B: $750 / 2 years = $375
  • Customer C: $500 / 3 years = $166.67

Divide by 2 to average them.

$375 + $166.67 / 2

Year 2 ACV = $270.84

——————–

Year 3:

  • Customer A: Not Included
  • Customer B: Not Included
  • Customer C: $500 / 3 years = $166.67

Divide by 1 to average.

$166.67 / 1

Year 3 ACV = $166.67

ACV Confusion Identified and Explained

Here are reference examples of the confusion.

Scenario 1 – SaaSMetrics.co

ACV  measures the value of the contract over a 12-month period. So let’s say a customer commits to a 24-month contract of $120,000. Considering this money will be recognized as revenue ratably, we’ll have $5,000 in MRR and therefore $60,000 as your ACV.

It is clear for one contract but this does not specify the outcome of more than one contract so I am not sure if I add or average.

Scenario 2 – Pipetop.com

Annual contract value (ACV) is an average annual contract value of your account subscription agreements.

This is my definition as well.

Scenario 3 – Zuora.com

Annual contract value (ACV) typically maps to an annualized bookings number. For companies that also charge one-time fees in conjunction with recurring fees, the first-year ACV might be higher than later-year ACVs in a multi-year contract.

This uses the term annualized bookings and average is not mentioned at all. This leans towards the idea of adding all contracts together vs finding the average value.

Scenario 4 – Venture Sandbox

ACV Bookings vs TCV Bookings: ACV (Annual Contract Value) counts the expected revenue within the first year, even though some contracts may be multi-year. In order to account for those multi-year contracts we have the TCV (Total Contract Value) metric. We look at both, but care primarily about ACV Bookings.

This uses the term bookings but then does not use the term bookings within the definition. It also doesn’t specify how to calculate ACV (or ACV Bookings) with more than one customer. It leaves you asking, should I add or average?

Scenario 5 – SaaS Optics

SaaS Bookings – Broadly speaking, bookings refers to the total value of accepted term contracts, contracted work or services, and changes to such contracts as of either the order date or the effective date of the transaction.

This simply is used to back up the fact that bookings is used to define total value and not average value. So when adding Bookings to ACV Bookings it would be a total value of first year vs average. Even more confusing is how sometimes bookings may not total multiple years but count them as renewals instead. Either-way though this would total first year value of contracts.

In Conclusion (Phew…)

I didn’t go into this planning on breaking this down quite so much, but as I dug further I found so many discrepancies that I started second guessing things and breaking this down for myself as well.

If you get anything out of this, I hope you have a clear way to calculate ACV and ARR for your company. And most importantly it should be defined so to be consistent with they way the rest of your team agrees to calculate and measure it.

SaaS-KPIs-Consulting

Originally published March 3, 2017, Last Updated March 8 , 2020

Source: https://www.inturact.com/blog/acv-annual-contract-value-vs-arr-annual-recurring-revenue

Blockchain

Bitcoin Cash Price Analysis: 10 April

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The correlation between Bitcoin and Bitcoin Cash stood strong at 0.729, showing a positive correlation between the prices of the two (denominated in USD). Bitcoin Cash saw some bullish news in recent weeks when it was announced that merchants that have integrated PayPal will be able to accept payments in BCH.

Bitcoin Cash 12-hour chart

Bitcoin Cash Price Analysis: 10 April

Source: BCH/USDT on TradingView

Bitcoin Cash was once again near the $670 resistance level. Further on lies the $750 resistance level, while support is at the $600-$610 area.

A leg upwards could be exactly the thing that has been brewing in the markets over the past month. Bitcoin and Ethereum have been unable to break past the stubborn resistance at $60k and $2000 respectively, suffering a sharp pullback before recovering. The positive sentiment around the market has been building for a few weeks now and could propel prices higher in the weeks to come.

The technical indicators showed that BCH has shifted back toward bullish momentum over the past two weeks, after dropping to test the $480 support level.

Rationale

Using the Elliot Wave Theory, the move from $220 (October) to $500 (January) appears to be the third wave in a series of five waves for BCH – and that wave also saw BCH register larger gains than the other two motive waves.

The move from $750 to $480 would then be Wave A of the corrective phase – and the recovery from $480 being Wave B. If this is indeed so, then BCH is unlikely to push past $750 once again.

The OBV showed that although buying volume was present, it has not yet made up for the selling volume seen since the drop from $750. This has to change if the bulls are to drive prices toward $800.

The RSI climbed back above neutral 50 to denote bullish sentiment.

Conclusion

A surging Bitcoin often sees market participants exchange altcoins for the king of crypto. This scenario would likely see coins such as BCH stagnate while Bitcoin soars. The $660 and $750 remain key levels of resistance and a move above them will invalidate the corrective phase scenario laid out in this analysis.


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Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://ambcrypto.com/bitcoin-cash-price-analysis-10-april

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Blockchain

How Ripple’s big win in court correlates with XRP’s 113% rally

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The bulls ride again on XRP’s side, as the token breaks about $1. On the legal subject, things seem to be going well for Ripple’s corner as rumors of an SEC settlement grow louder.

Back in December, the Commission hit Ripple Labs, executive Brad Garlinghouse, and Chris Larsen with a lawsuit for the alleged illegal sales of an unregistered security. In the coming month’s XRP’s price plummeted, exchanges delisted it, some investors lose faith.

As reported by lawyer Stephen Palley, Garlinghouse and Larsen scored a victory yesterday when Magistrate Judge Sarah Netburn rule that “discovery seeking 8 years of financial records along w/ subpoenas to 3d parties seeking same were too broad”.

Palley classified the decision as a “nice early win” by the defendants but is still skeptical about it being an indication for a resolution on the case. Palley added the following:

Winning a motion for a protective order on discovery doesn’t usually portend victory on the merits of the case itself. It depends. And the Court left open the possibility some of this could revisit later, if there are reasons to check veracity.

On the other hand, Galaxy Digital CEO Mike Novogratz said Ripple’s “equity is trading” at up to $3 billion in valuations on a secondary market. Novogratz speculated on the possibility XRP is rallying due to rumors of a possible settlement in the lawsuit.

Last February, the parties ruled out a settlement in a joint letter. However, the negotiations took place under the Commission’s previous directive. Gary Gensler is expected to be confirmed by the Senate and his more pro-crypto stance to have a positive influence on the legal process. Novogratz said:

Ripple equity is ‘trading’ in secondary market at $2-3bn valuation.  The $XRP on their balance sheet is worth approx $70bn. One price seems wrong. If XRP price is saying settlement coming, the equity is crazy cheap.   If not, the token seems expensive.   Thoughts?

Commenting on Novogratz’s statements Palley said there is no “public” indication a resolution is coming soon. The lawyer classified this subject as “inside” information and claimed a settlement will come after summary judgment practice. Palley added:

I don’t know how one can correlate price itself to settlement unless someone has inside information about potential SEC settlement/resolution and ability for exchanges to re-list for trading. Ripple has done better than I expected so far in preliminary motion practice and discovery fights, but there’s a long way from that to case resolution.

XRP in moon mode

Those who hold on to their tokens have been rewarded. XRP is trading at $1,32 with 29% profits in the past 24 hours and the biggest weekly rally in the crypto top ten with 113%.

Ripple XRP XRPUSDT
XRP on a bullish run in the 24-hour chart. Source: XRPUSDT Tradingview

Trader Kaleo said XRP is yet to reach its top and seems bullish on current price action. Comparing it to the 2017 bull-fun, the trader said XRP’s price quickly reach $2.45 when it broke the $1 mark. In the current rally, there is “way more capital” and fuel for the price to extend the bullish momentum.

In the last 24 hours, investors in South Korea are increasing XRP buying pressure as shown by the high trading volume in Upbit and Bithumb, two major exchanges in that country.

Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://www.newsbtc.com/news/how-ripples-big-win-in-court-correlates-with-xrps-113-rally/

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Blockchain

Chainlink, Aave, Decred Price Analysis: 10 April

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Chainlink moved within an ascending channel but a breakdown did not seem likely at least in the short term. Aave remained below its 200-SMA, while Decred was expected to break south from its ascending channel after touching $200.

Chainlink [LINK]

Source: LINK/USD, TradingView

Chainlink’s current price was at a crossroads on the 4-hour chart. On one end, a climb above $35-resistance on the back of a bullish broader market would likely boost LINK above its ATH of $36.9. The other end would see LINK move below the bottom trendline of its ascending channel.

A bearish divergence on the MACD did lead to a pullback, but the price was still within the confines of an ascending channel. If the fast-moving line does cross above the signal line, a breakdown can be avoided over the coming sessions. The RSI pointed north from 54 but was expected to fall towards the oversold zone after forming another peak in the upper territory. A breakdown would highlight $28.6-support, but the same could go as low as $24.4.

Aave [AAVE]

Source: AAVE/USD, TradingView

While Aave has attempted a recovery after the late February pullback, gains have been largely capped by a strong resistance line of $422.7. Another stubborn form of resistance came from the 200-SMA, a line that has subdued Aave’s attempt at a bullish comeback. At the time of writing, the candlesticks were below the 200-SMA and the bulls faced an uphill task to take control of the market.

The OBV moved flat over the last few sessions. On a whole, selling volume has outmatched buying volume since mid-February. The ADX pointed south from 26 as the price approached its long-term moving average. Even if the price does move north, failure to flip $422.7 to a line of support could lead to a breakdown once again. Support at $300 could cushion any losses seen during the mid-long term.

Decred [DCR]

Source: DCR/USD, TradingView

On the 4-hour timeframe, Decred moved within an ascending channel after a pickup from $175.7-support. Since the last two weeks, this has become a recurring theme for DCR. Ascending channels have led to a minor pullback but the bulls have swiftly negotiated them and maintained an upwards trajectory. Going by the same logic, a minor pullback was expected if the channel peaks at a psychological level of $200.

The $195 region could offer some support but a fall towards $175.7 was also likely in case of a sharper sell-off. For now, the RSI was in the process of forming its third peak in the overbought region and a reversal can be expected soon after. Meanwhile, bullish momentum was gathering according to the Awesome Oscillator.


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Coinsmart. Beste Bitcoin-Börse in Europa
Source: https://ambcrypto.com/chainlink-aave-decred-price-analysis-10-april

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