Go Big and Reap the rewards of a residual compensation model

While studying various compensation approaches that line up with the way we want to grow our business, one approach that largely stood out and was well aligned for both us and the partner was the residual compensation approach. Simply put, a residual compensation approach is one where instead of paying all the compensation upfront for getting a widget (a line activation), we would end up splitting the compensation into a small upfront compensation plus a percent of compensation in equal installments over the life of the activated line (or the life of the customer). Let's consider some examples. In the carrier (or Uncarrier, should I say) world, the revenue that comes every month with every single line activated is called Monthly Recurring Revenues (MRCs in short). MRCs are the prices of rate plans and features added but do not include overages, fees etc. Typically compensation is paid as a multiplier of MRC. Let's assume for simplicity sake, the carrier's policy is to pay 4X MRC upfront but now is looking to move to an un-carrier compensation of 1X MRC upfront plus 15% of MRC residual in equal installments every month. A typical MRC is around $50. In the upfront model, the carrier would have paid $200. But in the residual model, the carrier would pay $50 upfront plus 15% of $50 = $7.50 in installments every month as long as the customer stays active. You might ask: what's the difference between the two, other than when they get paid? The difference is evident when seen through a business plan. Let's assume a partner brings 1000 activations every month and on an average a customer stays 24 months. See table below for detailed calculations. In this model, the carrier pays $3.5MM in the residual model as comp versus $4.8MM in the upfront model, a savings of 27% EBITDA, a crucial arrangement for publicly traded carriers. This also ties into the fact that lines have to stay 24 months to get paid the right amount. If all lines stayed 24 months, then the effective compensation per line would be 1X upfront + 24*15%*1X residual = 4.6X. Compare this to 4X upfront, a 15% gain. While the carrier saves EBITDA in the initial years, the partner gets backloaded with more comp than expected from an upfront model. And the relationship's goals are aligned.

				Upfront Model	Residual Model
Month	Beginning customer Base	Number of new customers	Ending Customer Base	Upfront 4X Comp	Upfront 1X Comp	Residual Comp	Total Cash Flow
1	0	1000	1000	$200,000	$50,000	$7,500	$57,500
2	1000	1000	2000	$200,000	$50,000	$15,000	$65,000
3	2000	1000	3000	$200,000	$50,000	$22,500	$72,500
4	3000	1000	4000	$200,000	$50,000	$30,000	$80,000
5	4000	1000	5000	$200,000	$50,000	$37,500	$87,500
6	5000	1000	6000	$200,000	$50,000	$45,000	$95,000
7	6000	1000	7000	$200,000	$50,000	$52,500	$102,500
8	7000	1000	8000	$200,000	$50,000	$60,000	$110,000
9	8000	1000	9000	$200,000	$50,000	$67,500	$117,500
10	9000	1000	10000	$200,000	$50,000	$75,000	$125,000
11	10000	1000	11000	$200,000	$50,000	$82,500	$132,500
12	11000	1000	12000	$200,000	$50,000	$90,000	$140,000
13	12000	1000	13000	$200,000	$50,000	$97,500	$147,500
14	13000	1000	14000	$200,000	$50,000	$105,000	$155,000
15	14000	1000	15000	$200,000	$50,000	$112,500	$162,500
16	15000	1000	16000	$200,000	$50,000	$120,000	$170,000
17	16000	1000	17000	$200,000	$50,000	$127,500	$177,500
18	17000	1000	18000	$200,000	$50,000	$135,000	$185,000
19	18000	1000	19000	$200,000	$50,000	$142,500	$192,500
20	19000	1000	20000	$200,000	$50,000	$150,000	$200,000
21	20000	1000	21000	$200,000	$50,000	$157,500	$207,500
22	21000	1000	22000	$200,000	$50,000	$165,000	$215,000
23	22000	1000	23000	$200,000	$50,000	$172,500	$222,500
24	23000	1000	24000	$200,000	$50,000	$180,000	$230,000
Total		24000		$4,800,000	$1,200,000	$2,250,000	$3,450,000