BUSINESS TOOLS BLOG

October 8, 2008

Telecom Recurring Revenue Forecasting … what is the rule of 78’s?

Filed under: Forecasting — Tags: , , , — Sandi Mays @ 12:34 am

Republishing – originally published on 4/28/08.

The rule of 78’s is a simple math for those who need to estimate recurring revenue or recurring expense over the next 12 months. For example, Jim Crowe, Level 3 CEO, used the rule of 78’s to explain Level 3’s revenue on the Q1 2008 Earnings Call.

Formula –

(Current run rate) + (average monthly net installs * 78) = full year revenue or expense

Why does it work?

  • When you install a $1 of recurring revenue on January 1st, you will receive $1 of revenue every month for that year. Therefore, $1 of net installs = $12 of revenue for the year.
  • When you install a $1 of recurring revenue on February 1st, you will receive $1 of revenue for 11 months for that year. Therefore, $1 of net installs in February = $11 of revenue for the year.
  • When you install a $1 of recurring revenue on March 1st, you will receive $1 of revenue for 10 months for that year. Therefore, $1 of net installs in March = $11 $10 of revenue for the year.
  • Etc.

For those who like tables, see below:

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This is why installing revenue sooner is so important. Your average monthly net installs for the year might be $100,000 … but the revenue impact can be materially different depending on how these dollars come in. In the below example, each year shows $1.2M in Net installs, but the revenue impact is $10M in Ex. A vs. $5.6M in Ex. B.

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5 Comments »

  1. Sandi –
    I think when you wrote :

    ‘When you install a $1 of recurring revenue on March 1st, you will receive $1 of revenue for 10 months for that year. Therefore, $1 of net installs in March = $11 of revenue for the year. ‘

    You meant to say ‘= $10 of revenue for the year.’ Since March is the 3rd period, you lose out on the first two period of the year.

    Comment by Brent Fontana — October 8, 2008 @ 9:14 am

  2. Thanks Brent! I fixed it, and I am very proud of you for catching. This is a tough concept folks to grasp.

    Comment by Sandi Mays — October 8, 2008 @ 6:45 pm

  3. Good commentary. I have found that it’s much easier to teach people about this concept when I talk about in terms of “numbers of blocks”. Assuming 12 months and 1 new customer each month (12 x 12) how many blocks of revenue do I get to use if I need to estimate future revenue in a subscription model? Answer 78 blocks. Hence it’s called the rule of 78. If I can move my customers forward in the year, then I get to claim more blocks of revenue.

    Comment by Ian Gilyeat — December 10, 2008 @ 12:14 pm

  4. […] the Rule of 78’s which is very well known concept from the Telecom world as described well in the BusinessToolsBlog.com blog entry. It is simple math and the formula is as […]

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