What is Revenue Leakage? How To Keep Revenue Locked?
In simple terms, revenue leakage means that a business is unable to collect a 100% of its earned income. There is always a small percentage of income that gets ‘leaked out’, causing revenue loss. Revenue leakage is that amount of money from your customers which gets processed, but which does not end up in your account. This may happen due to a variety of reasons, which we will explore shortly.
For subscription-based businesses, revenue leakage means the waste of potential capital which has been rightfully earned. Revenue leakage can be calculated by adding up the expected income, and deducting the received income from it. The causes behind this gap range from errors in subscription handling to recurring billing inefficiencies. These amounts pile up gradually, and cause a considerable blow to the company’s finances.
Boasting revenue is the central goal for subscription-based businesses. These businesses invest a lot in sales, customer retention strategies and advanced billing software to grow their bottom line. If overlooked, revenue leakage can become a major setback for such companies. That is why, subscription businesses today do not work hard for revenue growth only. They also work on potential solutions to plug the holes in their accounting processes which cause revenue leakage.
In this blog, let us inspect the reasons behind revenue leakage, its impact on your business, and the ways to minimize it.
Why Does Revenue Leakage Happen?
An effective revenue retention strategy begins by identifying the reasons behind revenue leakage. These reasons can be ranked based on their economic value. Following are the seven common factors behind revenue leakage:
1. Operational Weaknesses
The biggest cause of revenue leakage is the operational inefficiencies which occur behind transaction processes. These inefficiencies can be both manual and automated. Manual weaknesses can entail something as basic as putting an incorrect total amount on a customer’s invoice. Dealing with the billing operations manually can also result in the inefficient management of revenue recognition and compliance procedures. Automated flaws, on the other hand, might entail your billing platform extracting incorrect data and repeatedly charging the customers less than due.
Moreover, if your business uses a simple billing platform for complicated payment scenarios, then operational flaws might arise. It is challenging to accommodate changes in a customer’s subscription plan without a robust billing platform. The resulting flaws accumulate over time and can prove costly to your SaaS business.
2. Price Incentives
Price incentives include coupons and discounts offered in order to attract new customers. However, providing too many discounts, or not keeping a proper check and balance of your offers might lead to reduced profits. This is also true for the coupons that your platform offers. If a company forgets to shut down old coupon codes, then the customers might still utilize them to pay less. There are a number of coupon code websites available which keep record of a company’s coupon codes and encourage the customer to use them.
3. Manual Management of Outstanding Invoices
Relying on your employees to manually track the invoice status of customers can be really inefficient. In the case of outstanding invoices, manual follow ups can be time-consuming. It also distracts you from delivering value to your customer, which must be your top priority.
Replacing manual efforts with an automated financial management platform like SubscriptionFlow can prove to be very effective for handling invoices. An automated solution like SubscriptionFlow which integrates seamlessly with accounting software such as QuickBooks and Xero is the ultimate solution to improve payment recovery. It also reduces your payment collection costs and enhances cash flow.
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4. Homegrown Solutions
Using homegrown technology instead of the expert, market-available billing solutions can result in revenue leakage. This is because inventing your own software might incur high development and maintenance costs. Such solutions take up a lot of your time and resources and slow down payment collection. All of this leads to potential revenue leakage.
5. Payment Declines
Payment failures lead to inevitable customer churn. Transaction failures might deflect even the most loyal of subscribers. Something as simple as a credit card expiring can bring an end to your relationship with your customer.
Furthermore, if the customer information is not updated in your recurring payment system, you might end up not collecting subscription fees from all your customers. A small percentage of your subscribers might be enjoying your services without having any money deducted from their accounts. This also causes revenue leakage.
6. Voluntary Churn
A loss of customers translates to a loss in revenue. If your customer is not satisfied with your services, and wishes to cancel or downgrade their subscription plan, it will cause inevitable revenue leakage. To prevent this from happening, you need an all-in-one subscription handling and retention management software in place.
7. Weak Internal Communication
It is important for teams working within an organization to be in sync. Lack of internal communication between key staff can lead to financial discrepancies. For example, if the sales team of a company has not been notified about the change in price structures, they might charge lower than the new rate’s demand. Another example can be of the team being uninformed about the ad-on service options at an additional cost. This misalignment can cost your company in the form of revenue leakage. It might also lead to frustrated customers, giving rise to churn.
How to Identify Revenue Leakage?
SaaS businesses rely on recurring billing functions for their cash influx. Having inefficiencies in these functions can lead to income losses. SaaS businesses accumulate their revenue over subscription cycles. If revenue leakage attaches itself to payment cycles, due to being unidentified, it amasses rather quickly to negatively affect the bottom line.
That is why, it is important to stop revenue leakage by plugging the loopholes timely. These are the three steps in which you can identify revenue leakage:
1. Form a hypothesis about where the leaks are.
2. Rank these leaks according to their economic value.
3. Test the hypothesis.
Testing the hypothesis means conducting a comprehensive audit to investigate each problem area. It is done by considering the existing data records, or ongoing financial processes.
Let us illustrate this process with an example. Let’s say there is a SaaS company which has noticed a decline in their revenue. This discovery would spur them to launch an investigation to identify revenue leaks. They hypothesize that most of their revenue leakage occurs due to under billing. According to the hypothesis, their system’s service usage tracking is flawed. Due to that, the customers are using more services than they are being charged for.
In order to test this hypothesis, the company would perform a detailed audit of their usage data, and would compare that data against their invoice records. If there is a discrepancy between the two, the hypothesis would be proven correct. They might find out that their billing system is not accounting for certain feature access. This might be leading to the subscribers enjoying premium features, while being charged for the basic ones. The company can then come up with an effective solution, such as an advanced automated billing tool to cater to their pricing tiers more effectively.
Now that you know what causes revenue leakage, it is time to get into action to prevent it.
Keep Your Revenue Locked in Place by Plugging Leak Points
SaaS businesses can implement these following rules of thumb to prevent revenue leakage:
Advanced Automated Billing
One of the surest ways to keep your revenue from leaking out is to automate your recurring transaction and invoicing processes. Manually handling spreadsheets to monitor transaction data is no longer viable, especially for recurring payments. Automation of financial operations leaves no room for human errors in the billing process. Thus, it minimizes the possibility of revenue leakage.
Get your business equipped with SubscriptionFlow’s advanced recurring billing features and track usage-based payments error-free. Our platform ensures that there are no loopholes in payment collection and that you are getting all of your rightfully earned money.
Management of Complex Billing Scenarios
Offering discounts and coupons is an effective way to engage customers. However, if these coupons are mismanaged, they can be misused. It results in revenue leakage. The same goes for the management of complicated pricing plans, such as volume and tiered pricing, as well as other customized promotional offers. An all-in-one billing solution needs to be set in place which is flexible enough to process all these pricing models accurately.
SubscriptionFlow is just the software you are looking for. It offers a range of billing solutions such as metered billing and proration. Our platform effectively tracks revenue, and saves you from discount miscalculations, streamlining workflow.
Smart Revenue Recovery System
Revenue leakage occurs due to transaction failures. Payment declines also result in an increased churn rate. That is because unintended payment failures can be a source of frustration for the customers. Through SubscriptionFlow’s smart dunning automation, your company can ensure maximum revenue recovery.
Our subscription management software makes payment retries while maintaining effective communication with the customers. Through SubscriptionFlow, you can personalize dunning emails, customize retry rules and benefit from advanced reports and analytics tools. Additionally, our platform integrates with multiple payment gateways to ensure transaction success even if a payment gateway failure occurs.
Seamless Customer Experience
Loyal customers are key to ensure revenue retention. Customer loyalty depends upon whether you company satisfies customer needs or not. In order to deliver a top-notch customer experience, integration with SubscriptionFlow is ideal. Our software empowers customers to manage their subscriptions themselves. This is possible thanks to our self-service customer portals. Through customer portals, subscribers can edit their contact, billing and payment information. They can also upgrade, downgrade, or cancel their subscriptions.
SubscriptionFlow provides your customers with a user-friendly and easy to navigate portal interface. Customers are free to personalize their portals as they like. It fosters a sense of ownership in them toward their purchased services. Improved CRM services manage subscription lifecycles flawlessly, ensuring there is no revenue leakage.
Conclusion
Revenue leakage refers to the amount of money that your company has rightfully earned, but hasn’t received. The key reasons behind revenue leakage in a SaaS business include accounting inefficiencies, manual intervention in billing operations, and mismanagement of discounts and coupons. Revenue leaks can be plugged via billing automation, advanced pricing management, and a smart dunning system. SubscriptionFlow offers all these advanced services and more. Book a demo with SubscriptionFlow to prevent revenue leakage, and grow your bottom line.
