- Have you ever heard of the Rule of 78? If you’re in Sales Operations, you should
- The Rule of 78 is the cornerstone of all monthly recurring revenue (MRR) quotas
- Use this logic to quickly model personal quota assumptions and more
University of Boulder professor emeritus Albert Adam Bartlett is an Internet celebrity posthumously famous for his YouTube lecture on arithmetic, population and energy. In the video, titled, “The Most Important Video You Will Ever See,” he postulates that “the greatest shortcoming of the human race is our inability to understand the exponential function.” Bartlett uses the story of the invention of chess to demonstrate a lack of human appreciation for how quickly numbers compound when they grow at a steady rate.
The story goes that an Indian emperor once asked a poor old mathematician to invent a new game for him, and he complied. The emperor, very pleased, told the mathematician to name his reward, to which the old man replied, “My needs are modest – on the first square of my new chessboard, I would like one grain of wheat. On the second, two; on the third, four; and please keep doubling them until you get to the 64th square.” The emperor’s servants set out to fulfill the request but ran out of wheat by the 30th square. Had they kept going to 64, the sum of all the wheat grains on the board would have been 18.5 billion billion! That is the power of the exponential function. If you are selling in a recurring revenue company, you can use a similar principle to harness its power and increase your earnings.
Have you heard of the Rule of 78? If you’re in sales operations, you should – the Rule of 78 is the cornerstone of all monthly recurring revenue (MRR) quotas.
This rule is a shortcut used to calculate the cumulative annual value of monthly installment revenue (quota). In a simple example, assume you are adding customers at a steady rate of one per month, with each paying $1,000 per installment. The long way to calculate the annual value, also known as a waterfall, looks like this:
The short way to calculate the annual revenue value looks like this: $1,000 x 78 = $78,000. Each month has a total number of installments (Jan=1, Feb=2, Mar=3, etc.). Sum up the installments per month and you get 78 (1+2+3+4+5+6+7+8+9+10+11+12=78).
Here are a few additional tips for using the Rule of 78:
Hack #1: Use the Rule of 78 to quickly model personal quota assumptions. It also helps you understand how the quota-setters are doing it for you.
Hack #2: Booking deals sooner in the fiscal year simply retires more quota. Use the Rule of 78 to see the impact!
Hack #3: Small increases in contract values compound quota retirement amounts. An incremental $250 sold in January is worth an additional $2,750 in quota retirement (11 x $250 = $2,750). Upsell!
Hack #4: Care about churn! Just as positive amounts compound throughout the year, so do negative amounts. Know customer contract expiration dates and start managing renewals long before they are due.
These are just a few simple principles to consider when your organization is operating in an MRR sales environment. There are sales deployment models (roles and responsibilities), forecasting complexities, sales compensation implications and growth strategies to consider. We’ll cover all of these topics more in depth in upcoming blog posts.