Revenue leakage is a critical issue that plagues many companies today, especially those with recurring revenue models. Despite being successful in selling their products and services, companies often struggle with collecting revenue. Unearned discounts, billing errors, and waived penalties are some of the culprits that contribute to the loss of revenue, which can quickly add up when multiplied by the scale of operations.
A survey by Boston Consulting Group revealed that 45% of executives view revenue leakage as a systematic problem in their organizations.
This article delves deeper into the concept of revenue leakage, why it is becoming increasingly common in recurring revenue organizations, and what steps can be taken to prevent it.
What Is Revenue Leakage?
Revenue leakage refers to the loss of revenue that goes unnoticed or is unintended by a company. With the rapid advancement of technology and the increasing number of customer offerings, revenue leakage has become a more prevalent issue for businesses. According to industry statistics, companies that suffer from revenue leakage can lose between 1 to 5 percent of their earnings. For large enterprises, this can result in a significant impact on their bottom line.
Revenue leakage occurs when a company experiences an unintended loss of revenue compared to anticipated expectations throughout a contract. For instance, if a provider’s internal systems cannot accommodate invoice proration for customers who start in the middle of a month, this could result in giving away 15 days of revenue each month, leading to significant revenue leakage amounting to hundreds of thousands of dollars annually, depending on the size of the contract.
Another common example of revenue leakage could occur due to human error. For example, if a $100 product is mistakenly priced at $50, it could lead to a loss of revenue equal to the price difference. These examples illustrate how even small discrepancies can add up to significant revenue losses for businesses over time.
What Are The Main Causes of Revenue Leakage?
- Inefficient recurring billing operations: Inefficient billing processes can lead to revenue leakage, caused by both manual and automated errors. One common issue is the inability of the system to handle complex billing cycles, which can result in missed revenue.
- Too many discounts: While discounts and coupons can be great incentives for customers, too many discounts can eat away at your bottom line. Additionally, if there are easily available coupon codes floating around online, your business could lose money because of old discount codes that you may not even remember issuing.
- Inefficient accounts receivable process: Inefficient accounts receivable (AR) processes can be a major source of revenue leakage. Manual follow-ups and reminders to customers can be time-consuming and costly. Automated solutions streamline and organize AR processes, helping to reduce collection costs and minimize resource consumption.
- Payment failures leading to involuntary churn: Involuntary churn occurs when a subscriber cancels a subscription due to mechanical reasons, such as payment failures or card declines. This can result in revenue leakage, and researchers estimate that involuntary churn accounts for a significant portion of a company’s total churn.
- Voluntary churn: Voluntary churn occurs when a customer cancels or downgrades their subscription plan. To prevent voluntary churn, businesses should identify problems within the customer journey and solve them as soon as possible. Analytics can also be used to inform changes to offers, workflows, or products to reduce voluntary churn.
- Communication between teams: A lack of internal communication can lead to costly mistakes, such as team members inadvertently charging too low of a rate or being unaware of a particular service’s add-on cost. Misalignment between sales teams and Customer Success Managers (CSMs) can also result in lost revenue and voluntary churn. To avoid these issues, businesses should establish constant communication between all teams across the enterprise.
How To Prevent Revenue Leakage?
- Leverage automation: Automating systems and processes around invoicing and recurring payments can prevent revenue leakage. By using an automated recurring invoice software solution integrated with existing operations, businesses can eliminate human errors and inefficiencies that slow down invoicing or lead to mistakes in manual spreadsheets.
- Establish a coupon system and review discounting workflows: To prevent revenue gaps, software companies should review discounting workflows and create a proper coupon system. By establishing and enforcing a process for single-use coupons, businesses can keep better track of coupons generated and redeemed by customers.
- Support different modes of payment: By supporting different payment gateways, businesses can ensure that customers successfully pay their subscriptions using their preferred mode of payment. Failed subscription payments can result in involuntary churn for subscription businesses. Smart payment retry and revenue recovery systems also help mitigate a significant portion of churn.
- Enhance customer relationship management: Improving customer relationship management can help businesses retain customers and reduce churn.
Stop Revenue Leakage With RackNap
RackNap is an end-to-end Ecosystem Orchestration Platform (EOP) that helps subscription service providers build profitable businesses. With RackNap, businesses can automate their subscription billing with next-gen automation capabilities.
How RackNap helps you prevent revenue leakage?
- It supports different plans, including Free, One-time, Recurring, Pay-per-use, and Contract plans. The plans come with auto-renewal and usage-based pricing.
- Pricing can be modified based on the billing cycle and number of units purchased. RackNap also supports bundled offerings to encourage customers to purchase more.
- It supports multiple currencies, tax levels, and rules. It also supports different payment gateways to ensure compliance.
- RackNap offers one-click functionality to perform various actions, such as creating orders on behalf of clients, adding billing credits, providing special pricing, renewing services, combining multiple transactions, and refunding money to customers.
- RackNap’s cloud billing intelligence offers visibility into upcoming payments and pending renewals. Clients can also access information such as their ledgers, credit notes, invoices, past orders, and more.
- With centralized repositories of data accessible through a role-based hierarchy structure, users can reduce audit time from weeks to days.
Book a demo to know how RackNap’s automated subscription billing platform can plug revenue leakage gaps.
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