Sales Managers, Sales Reps: Do you know the rule of 78?

The Rule of 78-As it applies to the reagent/consumable business revenue goal attainment.

Before beginning this article, I Googled “The Rule of 78” and reviewed a few of the articles. All of the entries I read focused on using the rule as a means of calculating how much of your monthly payment goes towards interest and principal on a loan. That isn’t what we are going to use it for…..

The Rule of 78 is used in the medical/diagnostic industry as a tool to calculate how much new business you need to close to hit your annual sales goal. It allows you to recalculate that increment/growth as the year unfolds.

You say, “Why do I have to recalculate, I have a sales budget that breaks down my goal by the month”. I say “That’s great, tell me what you’ve to sell for the remaining 9 months of the year if you missed your goal and didn’t sell everything in the first quarter”.
You say “Huh?”.

The Rule of 78 (in a budgeting application) allows you to calculate how much new business you need to close to hit your budget based on where you’re at that time (kind of sounds like the explanation from Pinocchio to the Prince in Shrek 3?).

Before we work through an example, consider those facts:

1) The Rule of 78 (Ro78) assumes that you maintain your base business.

2) The “increment” is the amount of new business you have to sell to add to your base business to hit your sales goal.
Base Business + New Business (growth or increment) = Your sales goal for the year.

3) The Ro78 allows you to calculate in “real time”

Everyone knows what their annual goal is, but how do you calculate how much you need to close each month if you missed your goal for the first 3 months of the year?
How much will you need to close to make up for an account that you lost in March?

The Rule of 78 to the rescue!

Let’s look at some examples now.

Your sales goal for the year is $122,000.
Your territory finished at $100,000 last year.
$22,000 is your growth or increment.
The company wants you do grow your territory $22,000 larger than it was last year.
$100,000 + $22,000 = $122,000
Base Growth/increment Annual Sales Goal

Your 08 total production.
It seems like you have to sell $1,833.34 per month, starting in January (122,000/12=$1,833.34)

Simple enough, right?
Keep that thought for a moment…

This is where they get The Rule of 78:

January 12 months left
February 11
March 10
April 9
May 8
June 7
July 6
August 5
September 4
October 3
November 2
December 1
78

The numbers to the right represent the number of selling months in a year.
You start in January with 12 months to sell; February has 11, March 10 etc.

Now to the fun part.

It is the end of March and you’ve only sold $1,000 and you should have sold $5500. ($122,000/12=1,833.34 per month 1,833.34 x THREE = $5,500)

Tell me how much you have to sell every month for the rest of the year to achieve your revenue goal?

First, I got to calculate how many selling opportunities I have left in the year.

78 Total Selling Opportunities in a full year
-33 (Selling opportunities lost-Jan-12, Feb-11, March-10=33)
Forty five Remaining selling opportunities

Your annual budget divided by the remaining selling opportunities equals the new increment or growth that you got to sell each month for the remainder of the year.

$122,000(annual sales goal)-$1,000(your actual sales for that period) / 45 = $2,688.88

Since you sold only $1,000 in January, February and March, your increment/growth went from $1,833.34 per month to $2,688.88

This means that you can still hit your annual sales goal if you maintain your base business and add $2,688 of new business each month for the remainder of the year!

Try one yourself:
Use the same annual sales goal of $122,000.
You sold $40,000 worth of new business by June.
How much new business (while maintaining your base) do you need each month to hit your annual revenue goal of $122,000?

1) Calculate the selling opportunities left in the year after June.
78-57(12-11-10-9-8-7) =21

TWO) Subtract the new business that you’ve done through June from your annual sales goal ($122,000-$40,000=$82,000) to derive the amount of new business you got to add each month for the last six months of the year ($82,000).

3) Divide $82,000 by the remaining selling opportunities (21) to get your new growth/increment-$3,904.76.

What does the $3,904.76 represent in this example?
That represents the amount of new business you need to add each month, beginning in July to hit your annual sales goal of $122,000.

It assumes that you sold $40,000 through June, when you needed to sell $61,000 to be on track to hit your annual budget of $122,000.

So, if you maintain your base business and add $3,904.76 of new business per month beginning in July, you will hit your annual revenue goal. Did you notice that your increment more than doubled because you missed you goal for the first six months of the year?

This tool is very worthy for reps formulating tactics to help Them achieve their goals. It is also very helpful for managers to help reps realize that there is a point of no return, i.e., a point in the year that they cannot “catch up”, even if they get a big order.

The reason being, there aren’t enough selling opportunities in the year.
This model only applies to re-occurring consumables and doesn’t apply to capital sales.

Your thoughts? Musings?
Put them in the comments or email me at: kraig@phcconsulting.com
Kraig McKee
Snr Headhunter

Article courtesy of  Peggy McKee - Owner / Senior Recruiter at the nationally
recognized clinical and medical sales recruiting team of PHC Consulting.
© Copyright 2008 PHC Consulting | All rights reserved

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