What incremental monthly recurring revenue (MRR) math says about the timing of hiring account managers?

It is very important to realize that an account manager that wins a business at the beginning of the financial year is much more valuable than an account manager that wins it toward the end of the year for a company that needs to show maximum possible incremental results every financial year. This is very true for SaaS Growth companies as well as companies that tend to bill every month through tenure exhaustion. The simplest way to explain this idea is: let's say that an account manager typically  produces an average attainment of 80% to quota and let's assume the revenue quota for the rep is $10,000 every month, then the account manager will bring in $8,000 * (12+11+10+9+8+...+1) = $8000*78 = $624,000 in revenues for the year. This is also sometimes known as the rule of 78. This is because once you get the deal, the revenues are recurring (unless the customer cancels, of course). So, a $8000 deal in Month 1 will net 12 times $8000 = $96K for the year; $8000 in Month 2 will net 11 times $8000 = $88K and so on to all add up to $624K in incremental revenues. Now, let's see what happens if an account manager is hired mid-way through the year and brings in revenues from Month 6 onwards. For the sake of simplicity, let's assume that $10,000 is the revenue quota and she still continues to clock 80% quota attainment every month. Is the incremental revenue brought in by the rep half the rep that has been attaining from the first month of the year? No, it is not and here's why. Using the same math as before, she will bring in $8,000* (6+5+4+3+2+1) = $8000*21 = $168K in incremental revenues. Essentially, the multiplier is not half of 78, which would be 39, but only 21, which is only about a quarter of 78.
So in the new year, the existing run rate without incremental revenues would have been $8000*12*12 = $1.152M. With the hiring of a  new rep that goes into production mode from Month 1 and therefore produces $624K in MRR, the company would be at $1.776M or a 54% growth. If the same rep is hired in Q2 and then takes three months to train and produces in Q3, then the MRR is only $168K and the company would be sitting at just $1.32M, only a 15% growth.
While the math is fairly explanatory, it is not always intuitive that an account manager on-boarded much later into the year produces significantly less revenues for that financial year. This so-called "Rule of 78" is key to understanding that reps that produce early into the year need to be rewarded more than those that produce later into the year. Similarly, if you are a public company, then reps that produce early in the quarter must be rewarded more than reps that produce later into the quarter to show healthy incremental quarterly revenues that Wall Street is looking for.

How to encourage account managers to bring in early revenues?

Some ways to encourage account managers to bring in deals early into the quarter are:

 - SPIFF for bringing in lines early into the quarter.
 - Use a formula that overweights quota attainment for deals that is brought in early into the quarter and underweights quota attainment for deals brought later into the quarter.
 - Do not compensate for deals brought in the last week of a quarter but move them to next quarter's attainment with a higher quota base requirement for next quarter to normalize for the deals phased into next quarter.
 - Do not panic and create last month of the quarter drastically attractive promotions to bridge any quota gaps. Forecast attainment gaps early into the quarter based on 90-day funnel volumes and create super attractive promotions right away before the quarter starts to help bring in over-indexed volumes in Month 1 of the quarter itself.


As further reading material, I came across a great article that further explains the math of SaaS revenue growth and the so-called "rule of 78" in simple terms. The link is below. Read, enjoy, and reap!

http://www.cloudave.com/1220/the-math-of-saas-revenue-growth/