04 May Sales Lessons: The Rule of 78
If you are a subscription revenue company (e.g. telecom, utilities, and real estate service providers), there is a good chance you charge recurring monthly or annual fees. These fees ultimately equate to your annual revenue as a company. As an executive, there is a powerful rule of thumb to consider when measuring the revenue impact of new sales and marking initiatives. It’s called the Rule of 78.
Using the Rule of 78, decision makers quickly estimate the Return on Investment (ROI) of sales and marketing initiatives which aim to increase the number of subscribers to the company’s services. Moreover, It is a powerful tool which management of Sales organizations can use to help estimate sales quotas. Below we illustrate the math behind this rule of thumb.
So how does it work?
It is simple. Multiply the revenue from new subscribers you expect to acquire each month by 78 to get your total estimated revenue for the first year. Many people ask why 78 instead of 12 for each earning? It is because the rule accounts for how revenue from new subscribers ramps up throughout a year. A $10 per month client closed in January will be worth $120 in the first year, while $10 closed in February will be worth only $110. This is because from February to December there are 11 months left in the year.
January 2017: $10 x 12 months left = $120 of revenue for 2017
February 2017: $10 x 11 months left = $110 of revenue for 2017
78 is the magic number for all recurring revenue businesses trying to implement sales quotas. It comes from the sum of digits in a 12 month year, 12+11+10…+1 = 78.
How can sales managers use it?
As a Sales executive, you can use the rule to calculate the monthly quota expected of your team. Let’s say you want to acquire $1,000,000 in new revenue for 2017. Simply divide your total new annual revenue goal by the rule of 78 to get your monthly sales goal.
New sales revenue goal = $1,000,000 / 78 = $12, 821 (monthly sales goal)
This means your total new clients have to provide around $13,000 of recurring revenue monthly. From here you can calculate the exact quote you expect from each sales person. You simply take your monthly sales goal and divide it by the number of salespeople. Let’s say you have a team of 4, this means each employee must reach a monthly quota of $3205.25 to meet your new revenue goal for 2017.
Monthly sales quota per person: $12,821 / 4 people = $3205.25
Now you know a simple reason why your sales friend Joe works extra hard at the beginning of the year.
Gopher Leads recognizes the significance of increasing your sales revenue. More importantly, we understand why you need to evaluate each method of growth before executing. This is why we have built a benefits calculator that will estimate exactly how much sales revenue you can acquire on the Gopher Leads platform. Not only that, our intuitive benefit calculator incorporates the Rule of 78 into its formula! It also allows you to input your company’s exact figures to give you the most accurate estimate possible.
Go ahead check it out here.