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.
What is the 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 estimate the sales turnover a particular salesperson will bring with a set target every month. To use the rule, you simply multiply the amount of new revenue you will bring in every month by 78 to get the total revenue that will come in during a 12 month period.
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 in a set amount of new revenue each month and that revenue is recurring, you can simply multiply the quota X 78 to get the total amount that each salesperson will bring in for the year. For example, if the sales quota is $ 5,000 per month then each sales rep will bring in a total of 5000 X 78 = $ 390,000 during the year.
Rule of 78 - How Is It Applied in Business?
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.
Math Behind the Rule of 78
On a side note, math geeks may recognize the Rule of 78 as the mathematical concept of "factorial." Somewhere in the back of your mind you will remember learning that 12! stands for "12 factorial" and = 12x11x10x9x8x7x6x5x4x3x2x1. If you add all of these up you get 78. Hmm. Now, it’s easier to come at the annual sales figure and set sales targets. Maybe we finally have an answer to, "When will I ever use this in real life?"