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.
- Revenue leaks
- Revenue pipeline leakage
- Revenue loss
The Risk of Revenue Leakage
The financial loss that revenue leakage can cause 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 for whom revenue leaking is an issue can expect to see reduced earnings by as much as 5% as a direct 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 are typically entered manually and often contain mistakes or omissions.
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 and Lack of Pricing Enforcement
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. Suppose a business is not providing consistent pricing and billing across its entire client portfolio. In that case, it’s likely to waste both resources and revenue by tailoring each price and billing at different intervals.
Not Using Data and Analytics Software
If data needs to be consolidated from a range of different siloed sources, it can be hard for a business to extrapolate meaningful insights from its customer data. 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.
Complex Pricing Structure
Complex pricing structures can create revenue leakage in a number of ways. One way is that they can be difficult for customers to understand, which can lead them to choose a different product or service that is easier to understand and compare. This can cause them to miss out on the best deal or value proposition. Additionally, complex pricing can also lead to confusion about how much a customer is actually spending, which can result in them spending more than they intended. This can be especially harmful for businesses that offer subscription services, as customers may be more likely to cancel if they feel like they are not getting good value for their money.
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
- Ambiguous or inaccessible policies
- 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…
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.
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.
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.
Reduce customer acquisition cost
When businesses can keep their customer acquisition costs low, it helps prevent significant revenue loss since advertising and marketing can be major expenses for businesses. Ultimately, by keeping customer acquisition costs low, businesses can protect their revenue and maintain a healthy profit margin.
Change the pricing model
It’s vital to match the service and customer usage of that service with the pricing model. For example, analysis of service usage data may reveal that there is an opportunity to bill based on consumption or use. By changing from a flat rate to a consumption-based or usage-based billing model, such as tiered pricing, a business may be able to increase revenue from those customers whose usage is higher.
Pricing mistakes can occur when customer contracts aren’t properly monitored, or when unearned discounts are incorrectly added during quoting or billing. It’s crucial that businesses have a system in place to enforce the company’s pricing rules and ensure accurate, error-free invoicing.
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.
Validating data between different applications ensures that the data entered into each application is correct. Failures must be reported to the relevant department on time so that they can be corrected before sending the final invoice.
Use a Revenue Intelligence tool
A revenue intelligence tool helps revenue operations teams identify patterns in their sales data to spot potential issues and investigate them further. With this information, rev ops can work to correct any discrepancies and prevent lost revenue. Additionally, a revenue intelligence tool can help companies improve forecasting accuracy and more accurately plan for future sales.
How a Revenue 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 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 identify revenue leakage?
Revenue leakage can occur due to a number of reasons, such as pricing errors, shipping errors, incorrect product mix, and more. In order to identify and correct revenue leakage, it’s important to first understand where the leaks are coming from. Here are a few tips for identifying revenue leakage:
1. Review your sales data closely. Look for patterns in customer spending, discounts, and returns.
2. Check your accounting records for discrepancies between actual revenues and expected revenues.
3. Compare your inventory levels against sales data to spot any mismatches.
4. Audit your billing and order processing procedures to ensure accuracy.
5. Ask your customers how they’re shopping with you – through your website, in-store, or both? What are their favorite products? How often do they purchase from you?
Once you’ve identified the sources of revenue leakage, you can take steps to correct them. Oftentimes, small mistakes can have a big impact on the bottom line, so it’s important to be diligent in tracking and correcting them.
What is the role of revenue assurance?
Revenue assurance is a strategy that enables an organization to ensure that it is obtaining revenue in an accurate and effective manner, across its full range of commercial offerings. By adopting a dynamic attitude to revenue assurance, businesses can reduce risks and inconsistencies linked to their income.
Tools and systems can be implemented to review all incoming streams of revenue, helping to identify and rectify any weak links in the revenue chain (such as inaccurate billing) helping organizations to maximize their overall revenue.