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There’s a new metric in town – weighted average contract value

The NPD Group has released research around the US B2B reseller channel – 2021 saw strong growth, with year over year revenue sales up 12%.   Comparing 2021 to 2019 – IE, pre-pandemic —  sales grew 8%.   B2B software sales were up 16% in the fourth quarter, driven by strong demand for endpoint protection software (up 27%). Work-from-home device revenue sales have begun to slow, per the research.   

I also want to highlight something in Protocol. I am quoting liberally from the piece.

In the SaaS industry, where it’s common for a small number of customers to account for the majority of a startup’s revenue, traditional metrics like average contract value (ACV) don’t always provide the full picture.  That’s why Lightspeed Venture Partners’ Nnamdi Iregbulem developed a new metric called weighted average contract value (WACV).

What is it?     It weights customers by revenue rather than equally, attempting to tell more about the business itself.   

To calculate weighted ACV:

Take the contract value of each customer and multiply it by the proportion of revenue that customer represents. A customer representing 1% of revenue gets a 1/100 weight, a customer representing 3% of revenue receives a weight of 3/100, and so on.

Then sum all those numbers.

Weighted ACV tells you where to look if you want to best understand the revenue of the business. For example, a WACV of $25,000 tells us roughly that the typical dollar of revenue is generated by a $25,000 customer. Thus, revenue retention/churn and other revenue dynamics of the business will tend toward what we’d expect for those kinds of customers. Revenue-weighting is especially helpful if the company in question has a large number of customers spending little or zero, contaminating the equal-weighted ACV calculation.

Why do we care?

First, I want to note that there are signs of a slowdown amidst the upbeat data.   I’m not down on the market; I’m just observing that it’s not necessarily a rocketship either.     12% growth is good… but it’s not record-breaking either, and other markets are much hotter.

Now, let’s talk about metrics.     Weighted ACV intrigues me because not all revenue IS equal, and companies with diversified revenue are good.      For those companies with large numbers of customers with little spending, this is an excellent way to clarify.      Take that as some insight that the venture is trying to get smarter with their data.