Sales Managers, Sales Reps: Do you know the rule of 78?
The Rule of 78-As it applies to the reagent/consumable business sales 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.
The Rule of 78 is used in the 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 need to recalculate, I have a sales budget that breaks down my goal by the month”. I say “That’s great, tell me what new business you have to close for the remaining 9 months of the year if you missed your goal and didn’t sell anything 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 growth budget based on where you are at that time(kind of sounds like the explanation from Pinocchio to the Prince in Shrek 3).
Before we work through an example, consider these facts:
1) The Rule of 78 (Ro78) assumes that you maintain your base business.
2) The “increment” is the amount of new business you need 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 have 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
$100,000-your total 08 production.
It seems like you need to sell $10,166.67 (base +increment/growth) per month, starting in January (122,000/12=$10,166.67)
Simple enough, huh.
Keep that thought for a moment…
This is where they get The Rule of 78.
January 12
February 11
March 10
April 9
May 8
June 7
July 6
August 5
September 4
October 3
November 2
December 1
78 selling opportunities..
The numbers to the right represent the number of selling opportunities in a year. You start in January with 12; February has 11, March 10 etc.
Now to the fun part.
It is the end of March and you have only sold $2,000 and you should have sold $30,499.98. ($122,000/12=$10,166.67 per month. $10,166.67x 3 = $30,499.98)
Tell me how much new business you need to close every month for the rest of the year to achieve your sales goal?
First, I need 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)
45 Remaining selling opportunities
Your annual growth budget divided by the remaining selling opportunities equals the new increment or growth that you need to sell each month for the remainder of the year.
$22,000(annual sales growth goal)-$2,000(your actual sales for that period) / 45 = $444.44
Since you sold only $2,000 in January, February and March, your increment/growth went from $282.05 per month (total growth goal for the year / 78) to $444.44. That means that you can still hit your annual sales goal if you maintain your base business and add $444.44 of new business each month for the remainder of the year.
Try one yourself:
Use the same annual sales growth goal of $22,000.
You sold $8,000 worth of new business by June.
How much new business (while maintaining your base) do you need each month to hit your annual sales growth goal of $22,000?
1) Calculate the selling opportunities left in the year after June.
78-57(12-11-10-9-8-7) =21
2) Subtract the new business that you have done through June from your annual sales growth goal ($22,000-$8,000=$14,000) to derive the amount of new business you need to add each month for the last six months of the year ($14,000).
3) Divide $14,000 by the remaining selling opportunities (21) to get your new growth/increment-$666.66.
What does the $666.66 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 while maintaining your base business.
It assumes that you sold $8,000 through June, when you needed to sell $11,000 to be on track to hit your annual growth budget of $22,000.
So, if you maintain your base business and add $666.66 of new business per month beginning in July, you will hit your annual sales 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 valuable 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 example is a little misleading, because technically, the rep could close a big order in December and hit his growth goal. I kept the numbers small to make the math easier. Realistic growth goals in today’s diagnostic market are somewhere between 8-30% and make the “Point of No Return” in June or July.
This model only applies to reoccurring consumables and doesn’t apply to capital sales.
Here is a visual representation of The Rule of 78 based on needing to generate $22,000 growth for the year.
Click here to view the Rule of 78 Chart
Your thoughts? Questions?
Put them in the comments or email me at: kraig@phcconsulting.com
Kraig McKee
Snr Recruiter
Written by Peggy McKee - the medical sales recruiter
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