Metric of the week #4: Annual contract value

Another metric to predict your revenue is the annual contract value or annual income per customer. This metric tells you how many contracts you need to sign to reach your revenue targets by the end of the year. In addition, the metric reveals information about the scalability of your business.

How you calculate the annual contract value depends on your business model. If you run a SaaS business, simply annualise and sum up all contracts and divide by the number of contracts. If you run more of a project-based business, you can take the turnover of the last twelve months and divide it by the number of projects. Both give you the annual contract value of your business.

With the annual contract value, you now know how many more contracts you need to close to reach your annual targets. It also shows you the limits of your current operating setting in terms of revenue and profitability. For example, if your business has a 90% occupancy rate, you will probably find it difficult to reach more than an additional 10% of customers without first optimising your processes or hiring new staff. Of course, a good strategy is to create attractive additional services to your existing offer. This way you can increase your annual contract value without serving more clients.

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