Stop obsessing over Average Contract Value: the ACV needed for exit is only $14k

Average Contract Value is important to know, but we’ve seen too many companies obsess over it as if it’s revenue or burn.  Maximizing ACV shouldn’t be the goal and as you’ll see below, SaaS companies that do exit had a modest ACV of only $14k.  ACV is a vanity metric that should be looked at as part of a group of ratios that include number of qualified leads, close ratio, sales cycle, and other critical sales metrics.  It shouldn’t be put on a pedestal.  Here is why:

 

-The world’s biggest and best software companies tend to have smaller ACV’s.  Below is a data set of 37 publicly traded SaaS companies and their estimated ACV’s at exit/when they went public.  To do the analysis, we looked at each Company’s financials before going public and compared their annual revenue to the number of customers at the end of the year to get an approximation of ACV (all contained in a filing called an S1).  Upon going public/exiting, the median ACV was only $14,449.  This makes sense as the universe of companies that can afford a lower ACV is much higher than those that can afford a $30,000+ ACV, so by focusing on a lower ACV, you can grow into a bigger company and exit faster. 

 

Company Ticker Year (Revenue) Revenue Customers Average Contract Size
Salesforce.com, Inc.  CRM 2003 $50,991,000                8,000 $6,374
NetSuite Inc. N 2006 $67,202,000                5,300 $12,680
Athenahealth, Inc. ATHN 2006 $75,812,833              10,500 $7,220
SPS Commerce, Inc. SPSC 2008 $30,697,000              10,156 $3,023
RealPage, Inc. RP 2009 $140,902,000                5,032 $28,001
BroadSoft, Inc.  BSFT 2009 $68,887,000                   425 $162,087
IntraLinks Holdings, Inc. IL 2009 $140,699,000                4,300 $32,721
Proofpoint, Inc. PFPT 2010 $64,790,000                2,400 $26,996
Jive Software, Inc. JIVE 2010 $46,268,000                   635 $72,863
Cornerstone OnDemand, Inc. CSOD 2010 $46,608,000                   480 $97,100
Lifelock LOCK 2011 $193,949,000         2,300,250 $84
Qualys, Inc. QLYS 2011 $79,713,000                5,700 $13,985
ServiceNow, Inc. NOW 2011 $128,072,000                   974 $131,491
Fleetmatics Group PLC FLTX 2012 $92,317,000              15,000 $6,154
Splunk, Inc. SPLK 2012 $100,542,000                3,300 $30,467
Bazaarvoice, Inc. BV 2012 $64,482,000                   587 $109,850
WorkDay, Inc. WDAY 2012 $199,128,000                   325 $612,702
RingCentral, Inc. RNG 2013 $135,941,000            300,000 $453
2U TWOU 2013 $83,127,000                       8 $10,390,875
Cvent, Inc.  CVT 2013 $89,584,000                6,200 $14,449
Five9, Inc.  FIVN 2013 $84,132,000                2,000 $42,066
Castlight Health, Inc.  CSLT 2013 $12,973,000                     95 $136,558
Veeva Systems Inc. VEEV 2013 $129,580,798                   170 $762,240
Zendesk, Inc. ZEN 2013 $72,045,000              38,951 $1,850
Hortonworks, Inc. HDP 2013 $10,998,000                   292 $37,664
Shopify SHOP 2014 $123,556,000            162,261 $761
Mindbody, Inc MB 2014 $76,620,000              42,000 $1,824
HubSpot, Inc. HUBS 2014 $93,830,000              11,624 $8,072
Box, Inc. BOX 2014 $124,192,000              34,000 $3,653
Appfolio, Inc. APPF 2014 $53,685,000              10,744 $4,997
New Relic, Inc. NEWR 2014 $84,732,000              10,590 $8,001
Instructure INST 2014 $56,678,000                1,400 $40,484
Xactly XTLY 2015 $61,111,000            194,000 $315
Twilio TWLO 2015 $166,919,000              28,000 $5,961
Atlassian Corporation TEAM 2015 $319,521,000              48,622 $6,572
Secureworks SCWX 2015 $262,130,000                4,100 $63,934
Nutanix NTNX 2015 $241,432,000                2,100 $114,968
           
Median         $14,449

 

-Increases in ACV aren’t free.  Usually 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, and the number of leads needed to complete a sale increases.  This makes sense because to get higher ACV’s, you have to focus on larger clients which inevitably means more layers of management to achieve an approval, more time required to identify the decision maker, more layers of bureaucracy to fight through, etc. 

 

-Salesforce’s pricing should be looked at as the standard.  For enterprise customers, Salesforce has packages that are $25, $75, $150, and $300 per user per month.  Salesforce’s most popular package is the $150 per user tier, so your product needs to be priced well within this tier, because many buyers will look to Salesforce as the cap: “why would we pay $X per user for that product when Salesforce is costing us $125 per user” is a common question any champion of your product will face.  To maximize growth, we find that ACV needs to be well within the $125 per user mark (perhaps 30% of it at most).

 

ACV is a metric that should be monitored, but don’t change the way you sell in order to artificially increase it.  While metrics like ACV are valuable, the real metrics you should be focused on are revenue and cash flow, and ACV is only one of many ways to impact both.  

 

 

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