If your business markets or sells SaaS products, odds are you’ve heard the acronym ACV used as a baseline to determine the quality of an individual customer and a key performance indicator to gauge the overall fitness of the business.
Whether you’re new to the SaaS industry or a seasoned veteran, the industry is constantly innovating and so are the metrics we use to evaluate best-in-class growth .
Which is why in this article, I will explain how to calculate ACV, its value to your business, and how increasing it has a symbiotic relationship with organic search marketing strategies.
Annualized Contract Value (ACV), not to be confused with monthly recurring revenue (MRR) or annual recurring revenue (ARR), is the contractually defined subscription revenue generated from a single customer or the total or average of all contracted customers in a given year. This metric is especially relevant to SaaS companies with a yearly or multi-year license provisioning model.
How to Calculate ACV
To prevent confusion, it’s important to plainly state that ACV is far from an industry-standard metric like MRR or ARR, and the metrics included in its calculation will depend significantly on the commercial model and what will provide the most analytical value for the business.
So, while one company's ACV calculation may vary significantly from another, it will always begin with TCV (Total Contract Value) divided by the number of years in the contract and can be expanded upon to include a combination of the following:
- Implementation and or training fees, which will impact the first year’s ACV but not subsequent years.
- Customer churn.
- Revenue driven through account or customer expansion via upselling/cross-selling.
- Calculating ACV value for all contracts and adding them together OR finding the average value.
Acknowledging that how one business calculates ACV will ultimately be different than another and contract value will vary significantly with business-to-business or business-to-customer sales, it’s clear there is no typical ACV for SaaS companies to benchmark success on. This means, the true value in using ACV as a core metric lies in its evaluation against other metrics.
The Value of ACV
While ACV is one of the core metrics that the most innovative SaaS companies use to measure their growth, see Salesforce’s use case here, its evaluation against your customer-acquisition-cost is certainly of analytical value.
For example, say your business is calculating ACV by TCV divided by the number of years plus the upsell/cross-sell revenue generated and averages the value per customer. Let’s say you have three customers:
- Customer 1: $12,000 (TCV) ➗3 (Contract Length) + $3,000 (Upsell for Premium Product Module) = $5,000
- Customer 2: $15,000 (TCV) ➗2 (Contract Length) + $10,000 ➗2 (Cross-Sell Additional Product Licenses) = $13,500
- Customer 3: $16,000 (TCV) ➗4 (Contract Length) + $4,000 (Upsell for Premium Product Module) + $5,000 ➗1 (Cross-Sell Additional Product Licenses) = $10,000
This business has ACV of $9,500 which is beneficial when they evaluate against their acquisition of $500, they’re able to calculate they have an ROI of 1900% on average per customer they acquire.
How to Increase ACV
It’s worth reiterating that your ACV and the methods you use to increase it will vary significantly by commercial model and whether your product is designed for the business-to-business or business-to-customer market. For example, the levers Hubspot pulls to increase ACV are different than Uber. However, despite the differences all the methods for increasing ACV leverage content as the hub of a hub and spoke strategy. Let’s take a look:
Aquire More Customers
The first method that may come to mind in terms of increasing ACV, and ultimately growth, is acquiring more customers. It’s worth noting, to limit the scope of this article we will only discuss the primary channels industry leading SaaS companies leverage for customer acquisition and we will assume your organization has a well defined buyer persona, and if you don’t, we wrote this guide to identifying them.
Organic Search Engine Marketing
Organic Search refers to positioning your website at the top of Google’s search engine results pages (SERPs) so it’s more easily found by your target audience. Organic search marketing is a direct extension of this and is the methods by which you use to rank such as SEO, content marketing, and link acquisition.
To properly leverage organic search you must invest in this channel through a combination of the aforementioned methods. To put this into context, when you Google something how often do you venture past the first page? If you’re like most of searchers, not very often. So, a robust Organic Search Marketing strategy is a cost-effective and scalable channel to continuously acquire customers who are well equipped with the information to make confident purchasing decisions.
Thankfully for you, AccretionEngine provides an agile solution for optimizing all components of Organic Search Marketing strategy so you don’t have to leverage tools like SEMRush or Ahrefs to do extensive keyword research and reach out to publications to feature your product.
Paid search, or pay per click (PPC) marketing, is advertising on the search engines themselves such as Google to pay for your website to appear at the top of the search results when searchers enter relevant search keywords or phrases.
This is meant to compliment your organic search engine marketing efforts and is not a cost effective or scalable long term solution, so we wrote an article on how to leverage the two in parallel.
Organic Social Media Marketing
Organic social media marketing is most applicable to business-to-customer products who are looking boost brand awareness through the channels that their users are most active on. For example, if your product is consumer app you might consider building your following through engaging content on TikTok and Instagram to organically inform customers about your product.
Paid Social Media
Much like paid search, paid social media refers to paying the platform or influential platform users (influencers with large organic followings) to advertise directly to prospects on the channels they're most active on to ensure exposure to your audience without having to go through the exercise of building a following.
Facebook offers a solution called Facebook Lead Ads which allows you to advertise on their platforms while aggregating customer information like email addresses to improve the ROI on your advertising spend and retarget them through omni-channel strategies.
Email is the perfect segue after discussing a method in which you can collect email addresses, you’re able to leverage them in the form of email lists where you can segment and continue to nurture and covert prospects into customers through tailored email strategies.
Email is another cost effective method directly into your potential customers’ inboxes, but the ways in which you gather emails can vary significantly and will most often stem from traffic driven to your website. Outside of having a direct online or in person conversation with your prospect, there is no better customer acquisition channel than email marketing.
Outbound selling refers to the practices of having individuals within your organization reach out directly to prospects via LinkedIn, phone, or email through 1:1 outreach. This method is most aligned to business-to-business SaaS products with a higher ACV.
Often times, if you’re able to properly retain customers through best in class user and support experiences you won’t need to look much further then your own customers for a well proven customer acquisition method.
This may happen organically, but to incentivize your customers we recommend putting in place a referral program that offers them something of meaningful value in exchange for the time they spend discussing your SaaS product with potential users.
By using virtual webinars or in-person events like Salesforce’s Dreamforce to connect with interested prospects and convert them to customers you'll be able to display product demos and build awareness about exciting new functionality. Also, with most events being hosted online it’s also an additional mechanism to capture customer emails to leverage for future initiatives.
As a SaaS business owner an essential component of maintaining a forecasted ACV and ensuring a high customer retention is reducing the churn rate through an exceptional customer experience.
Don’t just take our word for it, 50% of customers stated in a survey conducted by ZenDesk that they would abandon a product for a competitor after a single negative customer service experience and over $1.6 trillion is lost each year in the U.S. alone as a result of poor customer experiences. Here are a few ways we recommend improving customer experience:
While free trial churns aren’t included when calculating churn rate, customer experience begins the moment the agreement is put in place and the customer is provisioned licenses to your SaaS product. We strongly recommend putting onboarding sequences in place that either offer an onboarding call to walk through basic and advanced product functionality and/or strategically place content and videos to ensure users begin their experience with quick wins that encourage them to continuously expand their usage of the product. Even after onboarding, it’s becoming an industry best practice to consistently reach out to customers and offer support even if they haven’t asked for it.
Proactively Address Red Flags
By leveraging predictive analytics such as monitoring user logins, time to complete basic tasks on the product, or the time they spend actively engaging with your product you can identify and proactively address metrics that suggest poor user experience or potential for churn.
Once you’ve established these metrics and have a system for tracking them, you’re able to design an engagement strategy through surveys, user experience ‘check ins’, and other product led content in the forms of videos and articles to mitigate their churn risk.
Build a Strong Customer Service Architecture
There are several ways you can support this, from in-product live chat functionality to avoid customers waiting hours for customer support email responses or call holding times to the implementation of a customer facing knowledge base where customers can self service their issues and educate themselves on product functionality. It’s also important to ensure all this customer support data lives in an easily accessible system so you can review customer support inquiries and use them as a flywheel to improve your product.
Listen to Former Customers
First, when a user begins the cancellation process encourage them to stay and if they don’t, ensure you find out the reason why. While it’s fairly difficult to encourage a user to stay once they’ve made up their mind to abandon your product, the information you gather from them will be invaluable for improving product user experience and continuing to build out your customer service architecture.
Educate Your Users
Continued user education is a customer retention mechanism and an opportunity to upsell. By continuously keeping your users abreast of new product functionality, highlighting exceptional user-experiences and case studies, and helpful tips and tricks to improve their experience, you’re able to guide them through your products natural upsell funnel. More on this in the next section.
Upsell or Cross-Sell Existing Customers
Upselling to existing customers is not only an opportunity to reliably increase customer ACV but it’s also an opportunity to deepen the relationship with your customers by focusing the conversation on their goals for using the product.
It’s first important to distinguish the differences between upselling and cross-selling for SaaS products.
- Upselling refers to encouraging customers to purchase a more feature rich version of your product to unlock additional functionality or modules.
- Cross-selling refers to the exercise of aligning your customers goals and usage of their current product with another product in your product suite, for example if a customer has licenses to your marketing automation solution you’ll naturally look to cross-sell them towards your CRM solution to create an integrated front-office system architecture.
Educate Your Users (Continued)
By educating your users and helping them understand the value they already possess, you’re able to strategically nurture a natural upsell of premium features or the cross sell of additional products in your suite via emails, industry relevant use case articles, videos, and other applicable branded collateral to highlight the additional benefits they could unlock.
Offer a Free Value
While offering a free trial is a popular customer acquisition strategy, it’s also a very palatable upsell or cross sell strategy that allows customers to pilot the additional benefits and value they could gain after they’ve built a relationship with you and your product. Another potential lever is offering anniversary or other one-time discounts.
Put a Process in Place
Through the evaluation of your customers goals and the milestones of their user-experience put a system in place to track their progression through these milestones to engage and congratulate them at each stage.
By aggregating this quantitative and qualitative data you’re able to put a data-driven model in place to identify actionable insights on the best triggers for upsell and cross-sell opportunities and refine your existing strategies.
The Symbiotic Relationship with ACV and Organic Marketing
Within each method of increasing ACV, content plays a central role from informing prospects and acquiring new customers to retaining and upselling/cross-selling existing ones.
While all of this content will ultimately be organized at the website level through a CMS system (unless you’re leveraging a client portal), when prospects or customers look to find this content they’ll often begin with a Google Search.
If your content and website are not optimized to rank in the first page of Google’s SERPs and the market your company sells into is mature, your prospects and active customers will most likely be exposed to your competitors strategically positioned content leading attracting your prospects and active customers to your competitors websites.
It's clear there is tremendous business value in having a holistic organic search strategy in place to drive user towards the marketing and product content they need at each stage in their customer/prospect journey. If you don't currently have an organic search strategy in place, or feel as though there is room for improvement, schedule a complimentary traffic projection analysis with one of our SEO consultants to see the organic revenue your business is missing out on.