Revenue Leakage: The What, the Why and the How To Stop It
Sometimes, the name says it all.
Revenue leakage. The term itself implies something bad. A leak of any kind is never a good thing. A leak tied to your corporation’s revenue? Well, that’s a combination with potential disaster written all over it. Let’s take a closer look into the particulars. Just what is revenue leakage, why is it happening more frequently to impact recurring revenue organizations and how can you prevent it?
What is Revenue Leakage?
Revenue leakage, simply put, is any unnoticed or unintended loss of revenue from your company. Sadly, as today’s technological wizardry and the abundance of customer offerings increase so does the possibility of this becoming a problem for your business.
While leaks can come from both the revenue and expenditure side, revenue leakage most commonly is the result of not billing (or under-billing) your customer for products and services provided. Simply put, that’s leaving money on the table.
How big a problem is it? Big enough to warrant the well-worn statistic indicating companies suffering from revenue leakage stand to lose between 1 to 5 percent of their earnings unnoticed. For enterprise companies, this type of unintended loss can add up to a significant impact on the bottom line.
What Causes Revenue Leakage?
Revenue leakage is caused by any number of the following culprits:
- Companies unable to keep pace with today’s complexity
- Reliance on manual processing
- Pricing errors
Complexity Means Change
For those in the subscription billing/recurring revenue business, the one constant is change. Customers will buy new licenses, add on a product or service, upgrade to a higher level of service, or pause the service for a period of time.
If you’re not equipped to capture, track, and accurately bill for these changes during your customers’ lifecycle, you risk revenue leakage on a number of fronts. The increasing frequency of this type of business model today means more unintended lost earnings, vanishing with nobody the wiser.
Your ability to adapt and account for every change will keep revenue flowing to the bottom line, not leaking out before it can even be counted. Efforts elsewhere within your organization dedicated to customer success all could be for naught.
Another culprit? It’s us, humans, to be brutally honest. If your organization is relying on spreadsheets and the manual entry required to maintain them to track your recurring revenue, you could be leaking revenue and not realize it. Data entry errors in spreadsheets can cause losses in the billions because of an extra zero, a misplaced decimal, a careless cut and paste maneuver, or a hidden row of data. More spreadsheets, more duplicate data entry, more opportunity for error, and the greater the risk of revenue leakage.
Proper Pricing Enforcement
Spreadsheets are not the only culprits, however. Pricing errors can also occur when customer contract pricing is not enforced, or when unearned or inappropriate discounts are applied during invoicing. It’s vital to have a system in place that enforces your business rules and leads to accurate, error-free billings.
How Can Revenue Leakage Be stopped?
How revenue leaks can be stopped does not have a one-size-fits-all answer, but rather a variety of potential solutions, all dependent on the cause itself. Your response may vary, but common ways to resolve this issue include improvements in data validation, corporate guidelines, process workflows and increased use of automation.
Let’s dig a little deeper into some of the potential solutions to prevent revenue leakage.
Offering your service at different price points can help increase potential - and likely unknown - revenue. Tiered pricing models are often used in recurring revenue models to help give different options for potential customers, framing the reference for the price points.
Tiered pricing helps you make more money, broadens your potential audience, gives customers a choice, and helps maximize the value of your offering—preventing revenue leakage.
Setting up a more integrated internal knowledge management system can allow your team members fingertip access to corporate policies to ensure everyone is easily informed across the board on steps to follow. This can help prevent such questions as ‘is this task billable or not billable?’ and ‘what rate should I be using in this situation?’
Benefits of Agile Billing
Implementing a more intelligent and agile billing solution can provide multiple ways to address revenue leakage, including:
1. The ability to accurately account for commercial contract changes, including new licenses, add-ons, upgrades or pauses. This increased insight allows for proper capturing, tracking and accurate billing of any and all changes during a customer’s life cycle.
2. Advanced data mediation automatically collects customer usage and eliminates revenue leakage.
3. The flexibility to create pricing and rating models based on unlimited attributes help in the comparison of different models before going to market.
4. An elimination of revenue errors and enforcement of business rules, leading to more accurate and less error-ridden billing.
Leverage Usage-Based Billing
Revenue leakage may also occur when you’re not able to efficiently and accurately track and bill for different usage. If you can’t wholly track and bill for consumption-based services, more than likely you’re missing out on a significant revenue stream. Usage-based billing helps ensure you’re correctly charging for your services and never leaving potential revenue on the table.
Revenue Leakage Examples
Boiled down to the financial basics, revenue leakage refers to the loss of money spent by customers with their providers in comparison to anticipated expectations over the course of a contract.
For example, if the internal systems of a provider are unable to accommodate invoice proration, say, for customers who start in the middle of a month, that is essentially giving away 15 days each month. This could equate to revenue leakage in the hundreds of thousands of dollars a year range, depending on contract size, all because of the inability to change a date on an invoice.
Another example could come as the result of a man-made mistake. Let’s say a $100 product is mistakenly entered as costing $10. If an order is made for 50 products and that error is missed, a $4,500 loss in revenue is the result.
Sometimes a company may forget to create and send an invoice and doesn’t have the systems in place to catch this mistake. Your customers are unlikely to point out this mistake with a virtual raised hand, stating, “You forgot to charge me and I want to pay you.” Additionally, if separate systems - or worse yet, spreadsheets - track the due date and payment status of invoices, missing or incorrect information may result in a business failing to follow up on collecting past-due payments.
Luckily, RecVue’s billing, revenue and partner compensation platform can help any organization spot - and stop - these types of revenue leaks and more, better positioning businesses big and small toward a future of long-term growth and fully realized success.
Maximum Revenue with RecVue
Revenue leakage doesn’t have to be an inevitability of doing business. Technology advances in our age of digital transformation have assured that. RecVue’s agile monetization platform gives you control over all aspects of your recurring revenue from innovative pricing models to monitoring and reporting on all aspects of your company’s financial performance. Even those you may not have known existed. Leave no coin unturned with RecVue.