Sales compensation has historically rewarded “closers:” Those who successfully bring in net new revenues for the company are the kings of the hill. They earn the largest commissions.
Why not? After all, selling a net new customer is 5-7X harder than cross or up-selling to an existing customer. They should get all the credit, right? Wrong.
Focusing incentives solely on new customer acquisitions can accelerate customer defections and margin erosion. Sales reps are incented on acquiring new customers at the highest possible price. In reality, understanding what happens during the entire lifecycle of your customer deserves attention.
Times have changed. Today’s investor values sustainable profitability, not short term growth. Customers are well educated and know what they should be paying for products and services well in advance of a sales rep showing up in their office. They want value if they intend to maintain the relationship.
How can you match the strategy of your customers and investors? Strike a balance between weighting new logo and customer lifetime value incentives for your sales team.
Customer lifetime value is a simple equation that determines customer profitability for the duration of a customer’s average life with a vendor.
CLV = Average Customer Life X Annual Profit
The examples at the right show the impact of customer lifetime value. The prospects of earning $8K in annual revenues are initially attractive, but not if the customer leaves after only 3 years. On the other hand, retaining a customer for 7 years at a lower margin represents a 60% increase on the return.
Where should you begin?
- Start by determining the CLV for your customer base.
- Benchmark your customer lifetime value against a select peer group to determine a retention rate goal.
- Evaluate your incentive plans to determine how to best strike a balance between short term revenue (ie new customers) and long-term retention.
- Develop a strategy to incentivize your sales organization around CLV.
To make sure you aren’t leaving money on the table, assess your company’s customer lifetime value when conducting your sales compensation planning for 2012.