Want to become the sales top dog? Increase the tenure of your account. This post tells you why tenure matters the most.

How many reps realize that customer tenure is the biggest driver of margins bar none? The focus during the selling process typically has been mostly toward tweaking variables that only marginally impact profitability. Unfortunately, the highest influencer of margins - an account's effective tenure is not readily understood as it takes some math to envision the parts to the puzzle. I will try to deconstruct the math for the sales folks here, so they can use churn as a powerful tool in their arsenal to earn more.
Customer tenure is defined as the number of months a customer pays the monthly recurring service charge in a recurring revenue contract. Note that when a customer signs up a 24-month contract with a service provider, it does not mean that every single user license of the customer or, in the wireless carrier world, a line subscriber will stay with the provider all 24 months. Let's assume a customer has signed up 1000 end user licenses or subscriber lines for its employees with a service provider on a 2 year contract. Let's assume that each license costs $50 Monthly Recurring Charge (MRC) to the customer. This means the customer has contracted to pay $50,000 ($50 times 1000 units) per month for the next 24 months. The customer, however, will face a natural loss of lines or licenses (what we call monthly churn) every month due to employees leaving the company or business retrenchment in a weak economic scenario. Let's assume this monthly churn is 3%. That is, 3% of lines are disconnected every month and do not bring in revenues. See Table 1 below to note the comparisons based on how the account size decreases under the 3% churn and the 1.5% churn:

Table 1: Customer Tenure and Operating margins

As you might have readily noted, license revenue billed under different customer tenures tend to vary widely. In the first columns to the left, the customer generates the full revenues of $1.2MM when all licenses are actively paying for 24 months, the full tenure. In the middle columns, the customer only generates $864K of revenues, a decrease of 28% from the full-tenure revenues. In this case, the effective customer tenure is only 17.3 months. Meanwhile the operating margin has skidded dangerously down to 22% from 38%. If the company's policy is that deals with only 25% margins and above will be eligible for sales commissions, we can clearly see that this sales rep will lose out due to no fault of the rep.

What is the remedy?  The sales rep has two choices, either bring in additional lines or licenses (farming or inside sales) to negate the effect of the monthly churn or try to reduce voluntary churn (churn caused by perceptions of poor service or late shipment of devices or wrong license or rate plan types) in the account. We have seen cases where churn can be reduced by half if the sales rep managed the account's churn properly. The columns on the right in the table, then, show the effect on the margins under a reduced churn of 1.5%. As we can see, under a 1.5% churn, the revenues falls from $1.2MM to only $1MM, or a much better 16% drop than the earlier 28% drop. Consequently, the margins are also a healthy 31% compared to the dismal 22% earlier. Note that per the company's policy of compensating the rep for deals with margins greater than 25%, this farming rep will be handsomely compensated. 

Now to understand the sensitivity of margins to tenure, let's look at the same math slightly differently. The effective tenure under a 1.5% churn is 20.2 months much higher than the 17.3 months under the 3% churn. So, by adding 3 more months to the tenure (17.3 months to 20.2 months), the rep was able to increase the margins by 9% (22% to 31%), or about 3% per month of tenure added. From experience, I can tell you that such high 3% account margin sensitivities can only be had by increasing the account tenure. Tweaking MRC or costs or any MRC based discounts just does not produce the same sensitivity to margins. 

The bottom line, then, is all else being the same or even slightly uneven, a rep who manages an account's tenure better will always be more valuable to her employer, and will get paid more. Such is the impact of account tenure on margins, a fact seldom understood by sales reps and managers. 

Now that you know the math, will you increase your account's tenure to get paid more? Happy thanks giving all. Keep selling!!!