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Glossary » Revenue Leakage

Revenue Leakage

What is Revenue Leakage?

Revenue leakage is the term that’s used for organizations that lose revenue through financial or administrative errors. Depending on how a company operates and the industry they operate within, revenue leakage could stem from many sources and often goes unnoticed. Departments such as billing and finance are usually the main culprits, despite many companies undergoing thorough financial analysis and inspection on a regular basis. 

Synonyms

  • Revenue leaks
  • Revenue pipeline leakage
  • Revenue loss

The Impact of Revenue Leakage

The financial impact that revenue leakage can have on an organization can be significant. How much a company is losing will generally depend on the size of the business and the industry. However, it’s widely believed that companies struggling with revenue leakage have earnings that are 1% to 5% lower as a result.

Common Causes of Revenue Leakage

There are a number of different reasons why companies might experience revenue leakage

Faulty processes and systems

If a business has faulty financial processes or systems in place, it’s likely that it will experience revenue leakage at some point. Manual billing and processes are prone to human error, not to mention they often cause huge inefficiencies. The data contained in spreadsheets is typically entered manually and often contains mistakes or omissions.

Pricing errors

Pricing errors can come in many different shapes and forms, but one of the most common is providing promotional pricing to customers that continue past the promotional period. Another type of pricing error is when a customer continues to benefit from a discount based on a required quantity or volume, even when they fall below it. 

Discounts 

There are sometimes good reasons that not all employees have the ability to offer customers a discount. Discounts can remain unchecked and often, are too generous and not profitable for the business – lax discount policies are a business’s enemy. 

Inconsistent pricing and billing 

Pricing should be roughly the same across the board unless special circumstances such as order volume warrant a discount. The same goes for billing. If a business is not providing consistent pricing and billing across its entire client portfolio, then it’s likely wasting both resources and revenue tailoring each price and billing at different intervals. 

Not using data and analytics software  

If data is uncoordinated or has to be pieced together from different systems, employees may not have accurate customer data about how much volume the business is doing with a particular customer. This could result in undercharging for the goods/ services provided. Data analytics helps businesses to track their data and cash flows to find anomalies or detect delinquent transactions.

Revenue leakage examples

Aside from the above common causes of revenue leakage, other examples include:

  • Missed invoices and payments
  • High cost per customer acquisition
  • Not tracking tasks correctly 
  • Unclear or inaccessible policy information 
  • Unenforced policies 

A typical example of revenue leakage is  unearned discounts. Let’s say a company that provides a software product has a policy in place whereby if a customer wants more than 100 licenses for said product, they receive a 10% discount. Now, if the customer has 100 employees at the time of purchase, each with a license, then that customer has to scale down their operations and therefore, now only has 90 employees, but still receives the initial 10% discount for 100+ licenses, the software company is experiencing revenue leakage

How to Find and Stop Revenue Leaks 

It’s not all doom and gloom – revenue leaks can often be solved relatively easily. But there’s a process that needs to be followed…

  1. Find the culprit 

    First, businesses need to identify where their revenue leak(s) is coming from. While the top accounts are often the first place many companies look, it’s not always accurate.

    Revenue leakage isn’t all about the highest bill, it’s often more about how complicated a contract and its terms are that indicate whether an account is more likely to generate revenue leakages.

    To accurately identify a revenue leak, businesses need to consult with their execs, those closest to the revenue generation and revenue collection functions.

  2. Trace the workflows

    Once a leak has been identified, it’s time to trace the workflows to see where exactly the problem lies. It may be that an invoice wasn’t generated or sent on time, or that invoice wasn’t paid within the terms outlined, or perhaps systems weren’t updated by members of staff. 

  3. Make operational changes 

    Now that the exact point of revenue leakage has been pinpointed, operational changes can be made to prevent further damage.

    For example, if invoices were not paid on time, ensure penalty fees for late payment are added to all invoices, and reminder emails are shared at regular intervals to remind customers of the consequences of not paying on time.

  4. Automate 

    Many of the causes and sources of revenue leakage can be solved through automation.

    Automating emails such as invoice follow-ups, automating the generation of invoices in the first place, and automating manager approvals for time spent on administrative tasks are all ideal ways to utilize automation. 

How a Revenue Amplification Platform Prevents Revenue Leaks

Better subscription management is one way that businesses can prevent revenue leakage. Subscription-based pricing models have grown in popularity recently, with associated revenue exploding by 437% over the past decade. While there are many benefits associated with this billing model, revenue leakage is a common result of manual subscription management and renewals. 

Businesses can eliminate revenue leakage and instead promote revenue optimization by using a CPQ. Dealhub’s CPQ solution provides businesses with a revenue amplification platform that makes it easy to manage an ever-increasing number of subscriptions and renewals. It achieves this by incorporating the ‘sales playbook’ – capturing and communicating sales best practices – to simplify, guide, and control subscription processes.  

People also ask

How do you calculate revenue leakage?

Businesses need to analyze the amount they are being paid per customer or account, and the time and resources spent on that account to calculate their revenue leakage.
There are a few ways to do this:

1. Calculate profitability per customer – look at profit margins per account

2. Reevaluate task management processes – are there any bottlenecks or inefficiencies?

3. Review the tech stack – are the systems doing what they are supposed to and are any features going unused or employees don’t know how to use perhaps?

4. Talk to the team(s) involved – talk to those on the ground to see if they think there are any cracks where revenue may be falling through 

5. Add it all up – once you have the answer to all of the above, it will provide a good indication as to if any revenue leaks are present and where they are / stem from

How do you fix revenue leakage?

1. Find the culprit 

First, businesses need to identify where their revenue leak(s) is coming from. While the top accounts are often the first place many companies look, it’s not always accurate. Revenue leakage isn’t all about the highest bill, it’s often more about how complicated a contract and its terms are that indicate whether an account is more likely to generate revenue leakages.

To accurately identify a revenue leak, businesses need to consult with their execs, those closest to the revenue generation and revenue collection functions of the business

2. Trace the workflows

Once a leak has been identified, it’s time to trace the workflows to see where exactly the problem lies. It may be that an invoice wasn’t generated or sent on time, or that invoice wasn’t paid within the terms outlined, or perhaps systems weren’t updated by members of staff. 

3. Make operational changes 

Now that the exact point of revenue leakage has been pinpointed, operational changes can be made to prevent further damage. For example, if invoices were not paid on time, ensure penalty fees for late payment are added to all invoices, and reminder emails are shared at regular intervals to remind customers of the consequences of not paying on time.

4. Automate 

Many of the causes and sources of revenue leakage can be solved through automation. Automating emails such as invoice follow-ups, automating the generation of invoices in the first place, and automating approval workflows for time spent on administrative tasks are all ideal ways to utilize automation.

What is the role of revenue assurance? 

Revenue assurance is where processes and practices are put in place which enables an organization to capture revenue accurately from the available sets of products and services.

Organizations embrace this proactive approach to identify and eliminate risks and errors. Tools and systems can be implemented to review the entire revenue cycle to identify and rectify any revenue leakage points, which helps organizations to maximize revenue.