How to Use the Rule of 78 in Sales Formula in Your Sales Strategy

For businesses that earn recurring monthly revenue, forecasting income is key to setting realistic goals. One simple but powerful method for doing this is the rule of 78 sales formula. It helps business owners project how much revenue they can generate in a year and determine monthly targets for their sales teams.

This article explains what the rule of 78 sales is, how it works, and how to apply it for accurate forecasting in 2025 and beyond.

How Does the Rule of 78 Work?

The rule of 78 sales formula is a forecasting method used to estimate total annual revenue from monthly recurring income. It’s particularly useful for subscription-based businesses, where each new customer delivers a predictable monthly payment over time.

The number 78 comes from adding the numbers 1 through 12—representing the number of months remaining in the year for each new customer. A client added in January contributes 12 months of revenue, one added in February contributes 11 months, and so on, down to December, where the contribution is just one month.

Here’s the breakdown:

To estimate total revenue, simply multiply the monthly recurring revenue (MRR) target by 78. For example, if your monthly target is $2,000 in recurring revenue, the expected annual contribution based on the rule of 78 sales would be:

$2,000 × 78 = $156,000

This calculation provides a fast, dependable way to project income for financial planning and performance tracking.

Who Should Use the Rule of 78 in Sales?

The rule of 78 sales formula is best suited for businesses that rely on recurring revenue. These companies benefit the most from predictable monthly billing, where every new client adds a consistent stream of income for the remainder of the year.

Here are the types of businesses that often use the rule of 78 in their sales planning:

• SaaS companies offering subscription-based software services
• Streaming platforms that charge monthly access fees
• Managed IT service providers with recurring maintenance plans
• Marketing agencies with retainer-based contracts
• Online education platforms with tiered monthly memberships
• Subscription box companies delivering products each month
• Cloud-based productivity tools, including CRM, payroll, and accounting solutions

For recurring revenue businesses, the Rule of 78 helps determine how much revenue a sales rep or team needs to generate each month to meet annual targets. It also supports planning around hiring, budgeting, and campaign strategy—especially in the early part of the year when new customers contribute the most to revenue generation.

Startups and small businesses, in particular, benefit from this straightforward approach, as it offers a simple forecasting model without relying on complex financial tools. If you’re in the early stages of building a sales process or your company has recently shifted to a subscription model, this method provides a clear roadmap for growth based on recurring sales.

The Rule of 78 sales method is not limited to software or tech firms; it applies to any business with predictable monthly payments and a set monthly sales quota.

How to Calculate the Rule of 78 Sales Forecast

Calculating your annual revenue forecast using the rule of 78 sales is simple, but it requires consistency in your pricing and customer acquisition efforts.

The formula assumes that your business brings in one new customer every month, and that each customer contributes the same recurring amount. Based on this, the monthly contribution from each new customer decreases as the year progresses, since they have fewer months left to be billed. The total sum of these contributions across 12 months is 78.

Step-by-Step Calculation

Let’s say your business charges $500 per month per customer.

Multiply the recurring monthly amount by 78:

$500 × 78 = $39,000

That’s the expected annual revenue from adding one customer per month at $500 each.

If your sales team brings in two customers every month at the same price, the projected revenue would be:

2 × $500 × 78 = $78,000

Now suppose your business sets an ambitious goal of generating $250,000 in annual recurring revenue. You can reverse the formula to determine the required monthly income:

$250,000 ÷ 78 ≈ $3,205 per month

This means your sales team needs to generate at least $3,205 in new recurring revenue every month to hit the annual goal.

Using the rule of 78 sales, you can scale this calculation for each salesperson. If you have five reps, each would be responsible for roughly $641 per month in new recurring revenue.

This makes it easier to set realistic, measurable quotas and align your team’s efforts with long-term revenue targets.

Setting Sales Quotas Using the Rule of 78 Sales Formula

One of the most practical uses of the rule of 78 sales formula is setting performance quotas for individual sales representatives. It gives managers a straightforward way to assign targets that are aligned with the company’s annual revenue goals.

Let’s say your company aims to generate $390,000 in annual recurring revenue. Using the rule of 78, you can calculate the monthly quota needed to reach that goal:

$390,000 ÷ 78 = $5,000 per month

If you have three salespeople, each one should aim to close $1,667 in new recurring monthly revenue to stay on track.

This model encourages consistency over time. Since revenue from customers signed earlier in the year contributes more to the total, your team has an incentive to front-load their efforts in Q1 and Q2. Doing so will relieve pressure in the later months, when each new customer contributes fewer months of revenue.

You can also apply this model to individual performance tracking. For example, if a rep consistently delivers $2,000 per month in new MRR, their annual contribution would be:

$2,000 × 78 = $156,000

This allows you to compare rep productivity using a standardized approach and spot trends over time. If one team member is falling short, the numbers will show it. If another is consistently outperforming expectations, that too becomes clear.

In short, the rule of 78 sales method turns abstract targets into actionable monthly goals. It removes the guesswork from quota-setting and makes performance discussions more data-driven.

Rule of 78 in Lending—What Borrowers Should Know

Outside of sales forecasting, the rule of 78 is also used in the lending industry—though its impact often surprises borrowers. When applied to loans, this method influences how interest is spread across the repayment term and typically favors the lender’s position.

Under the rule of 78 in loans, more interest is charged during the early months, front-loading the payment schedule. A larger share of your initial recurring payments goes toward interest rather than reducing the principal. As the loan progresses, a higher portion of each installment is applied to the principal. While this structure may help lenders track new revenue on a monthly basis, it can reduce flexibility for borrowers who want to repay early and maintain stable revenue streams for the rest of the year.

Businesses looking to forecast cash flow or plan marketing efforts tied to financing should understand this model thoroughly. Although the rule may help some lenders quickly estimate potential returns, it can affect borrowers’ ability to build financial stability and may limit options if refinancing becomes necessary.

Carefully reviewing loan terms ensures businesses select repayment structures that support their long-term goals and enhance customer satisfaction—especially in industries where predictability and trust play a significant role in customer relationships.

Here’s how it works:

• A 12-month loan using the rule of 78 assigns interest using a formula where the first month is weighted 12/78, the second month 11/78, and so on.
• In this setup, nearly 75% of the total interest could be paid off within the first few months.

While this doesn’t impact borrowers who plan to follow the full payment schedule, it becomes important for those looking to pay off their loan early. Paying off a loan early under this structure results in less savings than with a standard amortization schedule, because most of the interest has already been paid.

This approach is often used with:

• Short-term personal loans
• Auto loans
• Business loans for subprime borrowers

It’s important for borrowers to read the fine print. If a loan follows the rule of 78, early repayment may not save as much money as expected. Businesses considering financing should always ask how interest is calculated and request a breakdown of the repayment schedule.

Strengths and Limitations of the Rule of 78 Sales Model

The rule of 78 sales formula is a helpful starting point for revenue forecasting, especially for businesses that depend on recurring monthly income. However, like any model, it has its strengths and its limitations.

Strengths

• Simplicity: The biggest advantage of the rule is that it’s easy to understand and apply. You don’t need complex software to run calculations—just basic math.
• Goal clarity: It helps define clear, monthly revenue targets. This makes it easier to assign responsibilities and track progress.
• Motivation for early sales: Because the value of a customer decreases as the year progresses, the rule encourages early-year prospecting and deal-closing.
• Useful for planning: Businesses can use the rule to plan hiring, marketing campaigns, and cash flow projections based on expected revenue from new monthly subscriptions.

Limitations

• Assumes zero churn: The formula assumes that all customers stay active throughout the year. In reality, cancellations, downgrades, and churn can affect the final numbers.
• Flat pricing: It works best when every customer contributes the same amount monthly. Tiered pricing, usage-based fees, or discounts can reduce accuracy.
• Ignores upsells and add-ons: Any revenue generated from upgrades or additional services isn’t accounted for in the basic model.
• Not ideal for non-recurring revenue: If a large part of your business comes from one-time purchases, the rule of 78 may not give you the full picture.

Still, for early-stage startups or growing businesses looking for a simple framework, the rule of 78 sales formula can provide a valuable baseline. Just remember to adjust for churn, pricing changes, and business-specific variables as your company grows.

Applying the Rule of 78 Sales Model in 2025

In 2025, recurring revenue continues to be a priority for growing businesses. With increased competition, shifting customer behavior, and rising customer acquisition costs, predictable income has become more important than ever. That’s where the rule of 78 sales model offers the most value.

For companies offering monthly subscriptions or service retainers, using this rule helps break annual revenue goals into manageable monthly targets. It also helps businesses take control of cash flow early in the year—a critical factor when planning expenses, expanding teams, or seeking funding.

Here’s how businesses can use the model today:

• Startups in early growth stages can use it to guide hiring plans. Knowing how much recurring income is expected each month helps determine how many reps to onboard and when.
• Established companies with stable churn rates can use the rule to support annual sales planning and set sales targets that align with broader strategic goals.
• Service providers with monthly client retainers can forecast what revenue looks like if they add a fixed number of clients per month at a consistent rate.

The rule of 78 sales model also complements other forecasting tools. While CRM platforms and analytics dashboards provide real-time insights, this method gives teams a high-level view of what’s achievable with consistent acquisition.

It’s especially useful in industries where customer lifetime value is tied to subscription length. When applied properly, it can help align sales, marketing, and operations toward the same monthly targets.

As more companies embrace subscription-based pricing, the rule remains a relevant and accessible tool for forecasting recurring revenue—and for building smarter sales strategies in 2025 and beyond.

Ready to Reach Your Revenue Goals?

If you’re planning your sales growth or looking to scale your recurring revenue model, having the right financial support is just as important as having the right forecast. At SMB Compass, we provide tailored business financing solutions designed to help you stay on track with your revenue goals.

Whether you’re expanding your sales team, investing in marketing, or covering operational costs while you grow, our funding options are built with small business needs in mind.

Apply now to explore financing options that align with your sales strategy.