Sales Forecasting: Use the Rule of 78

Everyone knows what their annual goal is, but how do you calculate how much you have to close each month if you missed your goal for the first 3 months of the year?  The Rule of 78 to the rescue.

Sales goal planning needs more than a crystal ball.

The Rule of 78 is used in the diagnostic industry to calculate how much new business you need to close to hit your annual sales goal. It allows you to recalculate that increment or 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 new business you got to close for the remaining 9 months of the year if you missed your goal and didn’t sell enough in the first quarter.”

That’s why you need the Rule of 78.  It allows you to calculate how much new business you need to close to hit your growth budget based on where you’re at that time.

This tool is very worthwhile for reps formulating tactics to help ‘em 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.

Before we work through an example, consider these facts:

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

TWO) 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.

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

How much will you’ve to close to make up for an account that you lost in March?

Let’s look at some simple examples now:

Your revenue goal for the year is $122,000 and your territory finished at $100,000 last year…so, $22,000 is your growth or increment.

The company wants you to grow your opportunity $22,000 larger than it was last year.

$100,000 + $22,000 = $122,000
Base Growth/increment Annual Sales Goal

$100,000-your total last year’s production.

It seems like you have to sell $10,166.67 (base +increment/growth) per month, starting in January (122,000 / 12 = $10,166.67)

That seems simple enough—but hold that thought.

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 TWO

December 1

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.

That equals 78 selling opportunities.

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 THREE = $30,499.98)

Tell me how much new business you got to close every single 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 got 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 revenue 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 have 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 have 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 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 example is a little misleading, because technically, the rep could close a top order in December and hit his growth goal—but that’s a major gamble. I kept the numbers diminutive 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 ‘em in the comments or email me at: kraig@phcconsulting.com

Kraig McKee
Snr Recruiter

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

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Sales Forecasting: Use the Rule of 78