If you know the quota that a salesperson must bring annually (e.g. 780k) and you want to know the set amount of NEW revenue the Sales Person must bring in every month, then learn about the "Rule of 78" with this blueprint.
Does it seem like every salesperson you know has shifted into high gear once the new year starts? If so, it is likely because they understand the infamous Rule of 78. Simply put, the Rule of 78 is a way to quickly estimate a full year’s worth of revenue for businesses that deal with monthly recurring fees. By applying this rule you can quickly understand the NEW sales turnover a particular salesperson must with a set target for the entire year. To use the rule, you simply divide the total revenue that will come in during a 12 month period by 78 to get the amount of new revenue the salesperson has to bring in every month.
At first, you may think that the magic number for figuring a year’s worth of revenue is 12. However, for subscription-based products or other monthly-recurring revenue scenarios, keep in mind that every new dollar brought in will be with you for the rest of the year. So, a new sale of $ 10 in January will be worth $ 10 x 12 = $ 120 for the whole year. However, in February you will bring in another new sale that will be worth $ 10 x 11 = $ 110. In March, your new sale will be worth $ 10 x 10 = $ 100. If you work out the math, the result is that there are 78 months worth of revenue in a year assuming that you bring in the same amount each month.
Typically, the Rule of 78 is used with sales quotas. If a salesperson must bring a total amount of recurring revenues you can simply divide the quota by 78 to get the set amount of new recurring revenue each month. For example, if the total annual quota of recurring revenue is $780k, the sales quota of NEW MRR will be 780k / 78 = 10k.
Once you understand the Rule of 78, you understand why salespeople are so busy at the beginning of the year. Sales made in January will have 12 months of billing for the year; whereas sales made in July will only have 6 months of billing in the current year. In other words, sales made in January are worth 2x more than sales made in July. Companies know this and will often run incentive programs early in the year to drive more sales sooner to increase the annual sales turnover.
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