According to MGI, 42% of companies experience revenue leakage, which is an alarmingly high number. There is a high probability that you have some form of revenue leakage and you don’t even know it yet. 

A steady drip of revenue loss can add up to hundreds of thousands of dollars (maybe even millions) and significantly impact the bottom line, especially if you are operating with razor-thin margins.

The fact is, if you can master the strategic pieces we go over below, you will position your company as a lean, mean, fighting machine that your competitors will have a hard time keeping up with. With the revenue that you stop from leaking, you can funnel it into other areas of your business such as marketing or product, or R&D to enable you to outpace and outperform your competitors.

what is revenue leakage?

Revenue leakage is revenue that you are not collecting due to human error, incorrect processes, or manual billing systems. In some cases, you aren’t even aware of the revenue that you are missing out on. The bright side is that revenue leakage can be minimized if not eliminated altogether.

If you're not paying close attention to your process of collecting revenue, you might miss the warning signs of a problem that could put your business at risk. That may mean that you and your team need to take a hard long look at your processes and systems to see where you can make improvements for the long run. This is especially true if you have a lot of manual processes or systems that are not integrated with each other.

But the question remains as to what causes revenue leakage and how to spot it. A proactive approach to revenue assurance will give your organization the confidence to scale. Let’s start with the causes.

what are the causes of revenue leakage?

poor data management

Regardless of whether you are entering data manually or have data siloed in specific departments, your business is vulnerable to revenue leakage. With poor data management, issues start to pop up like:

• Letting cost changes slip
• Error-prone, time-consuming rate updates
• Maintaining varied pricing requirements

Any time data needs to be manually entered or is siloed off in a department, you risk increasing the rate of human error as well as the additional overhead costs to manually manage and oversee all the data. If you're a global company with international customers, it can be even harder to keep track of all the different payment methods and contract terms. Errors made while manually updating pricing can also affect your revenue. 

manual billing processes

Does your organization still use spreadsheets to calculate billing? If so, this is one of the reasons why you are losing revenue. Manual billing processes are not only cumbersome and prone to error, but it also takes up a lot of administrative overhead. Human error, while manually tracking time or creating invoices, can often be hard to detect and result in revenue leakage if certain important terms of the contract are missing or erroneously entered.  

It's difficult to generate detailed billing reports when working with manual data, and if you have some aspect of usage-based billing, it becomes near impossible to track everything manually.

Manual billing systems are not designed to manage complex billing models or automatically adjust invoices for overages, surcharges, and discounts. The odds that there is revenue leakage in this scenario go up exponentially compared to a system that automatically bills customers for you. 

For more information on how automating your billing helps your SaaS business, check out this article.

billing inaccuracies

As we mentioned earlier, generating invoices manually is inefficient and error-prone. Often companies that invoice manually lose track of the billing cycle and miss invoicing customers. You may be under or over-billing your customers without realizing it. Underbilling affects your revenue and over-billing may create distrust amongst your customers and can even lead to churn. 

We can’t stress it enough that if you are not implementing some form of automated billing system that generates invoices based on usage data or their subscription plan, the odds of human error go up as well as the overhead to manually process billing. 

lack of automation

contract renewals

This goes back to the issue of manual processes but if you have any custom pricing, custom plan tiers, or one-off situations that need to be taken into consideration when it comes time for contract renewal, you are probably going to have some revenue leakage. 

But if there is still a company that is keeping up with accuracy while renewing contracts manually, it is typically due to throwing a lot of people and account management time to properly manage everything (taking data from a spreadsheet, doing an audit on contract specifics, setting reminders). This means that revenue leakage is even occurring simply from overhead, which could be reduced if the process was automated.

We have a great video that talks more about enforcing contract commitments.

flawed engagement with customers

Indirectly, revenue leakage can also be created within customer service departments. Poor communication, bad customer service, lack of contract support are all ways that can lead to lost revenue. 

With busy sales reps, it can be easy to let tasks fall through the cracks, especially with a large customer base. Without automated systems in place, reps are left to manually track billing cycles, discounts, custom package deals, and usage data. This can lead to not billing the correct amount, forgetting to invoice at the right time, and the list goes on.

For example, if a customer is wanting to upgrade their services and is talking to a sales rep to renew their contract, there are a lot of ways that revenue leakage could happen.

• Forgot to add pre-arranged package addons
• Not having up-to-date information in their CRM to complete the renewal process
• Bad customer service while communicating with customer
• Forgetting to send a contract renewal
• Creating an incorrect invoice

what are the preventative measures against revenue leakage?

centralized customer data

automate as much admin work as possible

Automating administration work is important in preventing revenue leakage because it reduces the amount of human error. Workato is a no-code automation tool that lets you connect your apps into automated workflows, which can help to prevent revenue leakage by reducing the amount of human error. When you combine a tool like that with an enterprise level CRM, quoting, G/L, and billing solution like Salesforce, NetSuite, and Logisense, it removes the human element as much as possible and unleashes efficiency as well as regains any revenue that was leaked through overhead or human error.

eliminate revenue errors by automating your billing

If you are still using outdated billing methods to track your recurring revenue you may be leaving money on the table without even realizing it. Incorrect manual data entry can lead to huge losses in revenue. Errors like misplaced decimals, extra zero, or a copy-paste error can sometimes be a cause for huge losses. It's time to ditch the spreadsheet and manual billing methods if you want to reduce and eventually eliminate revenue leakage.

accurately account for contract changes

You should have systems in place to track, capture and accurately bill your customers throughout their customer lifecycle whether they add a new license, pause a subscription, upgrade their services, etc. You should also ensure that any unearned or inappropriate discounts are not applied during invoicing. 

Your billing system should be able to adapt and account for contract changes during your customer’s lifecycle and ensure there are no leaks in recurring revenue.

manage involuntary churn

Involuntary churn can form a large part of your revenue loss especially if your billing processes are not automated. You can start by switching to automated contract renewals as this can reduce revenue loss to a great extent.  Most customers also find this to be more convenient.  You can also try revenue recovery tools like an automatic account updater that tracks and updates expired cards and helps with retrying failed payments, and dunning management. 

how to detect revenue leakage?

Step 1: Review your sales process

One of the first steps you can take to reduce revenue leaks is to take a birds-eye view of the entire sales process. Before making sweeping changes, it is important to fully understand the process so you can identify weaknesses or efficiency opportunities. As questions like:

How do you manage opportunities?
Where is data stored?
Who manages this data?
What is the contract process?
What is the renewal contract process?

Step 2: Review your billing solution

Spreadsheets are a common source of revenue leakage, as they are prone to human error. Outdated billing and accounting systems can also lead to revenue leakage because they may not be able to properly track all of the company's income and expenses. An audit can help you identify errors in your billing system. Understanding the workflow that led to a mistake can help you identify and fix problems. Collect input from your accounting team to get deep insights into the process and where the weaknesses are. Ask team members how they go about specific business processes, and recreate the process step by step. Stress that you're not looking for somebody to blame, but that you're looking to solve the problem together.

For more information on how to automate dunning and collections, check out this article.

Step 3: See if you use many different pricing structures

It is important for a company to have well understood pricing structures in order to eliminate confusion and revenue leakage. Having a consistent and accurate pricing structure helps sales and deal desks make fast decisions, and also allows logistics companies to manage rates more effectively.

Step 4: Determine if you have standardized billing terms

It is important to have standardized billing terms in order to detect revenue leakage because it allows companies to more accurately track their revenue and identify any discrepancies. Without standardized billing terms, it would be more difficult to detect if there was any revenue leakage occurring.

Step 5: Check if you offer lots of discounts

Revenue leakage can occur when discounts are used and not properly tracked. This can happen when a promotion is not stopped after it is over, resulting in lost revenue.

Step 6: Evaluate reporting and analytics

You are blind without reports and analytics. Keeping accurate reports that track metrics like customer churn, customer lifetime value, and other customer metrics will give you a baseline to go off of. As you improve operational performance, contract renewals and upsell opportunities, you should see these numbers improve. We recommend you find more ways to monitor your operations, customer support and billing (hopefully in an automated way) so that you can keep an eye on new ways to improve revenue leakage.

Step 7: Measure the effectiveness of changes

It’s not just enough to spot and fix the leak, you also have to measure the effect of fixing the leak to ensure it is successful. For instance, if your realized committed pipeline and forecast remain misaligned even after fixing the leak, then there’s a good chance that you need to iterate the entire process. The best way to measure your results is to use your reports and analytics as a way to track improvements. 

conclusion

You now have the insights as to what revenue leakage is, areas that are affected, and how to minimize it. This is the easy part. The hard part will be to actually implement large changes across your team and operations. This will not be an overnight success, it will take weeks or months to see results so please stick with the process and the results will speak for themselves.