During periods of economic uncertainty or a looming recession, getting a handle on revenue leakage becomes even more important. Read on to find out the most common causes of revenue leakage and how your company can combat it.
What is Revenue Leakage?
The revenue leak, or revenue leakage, definition is revenue that an organization has earned, or counted on earning, that has not yet been collected.
Simply put, it’s money that you have done the work for but not yet received.
Revenue leakage can be due to various factors, such as deal slippage, inaccurate billing, bad data, manual processes prone to human error, or unbilled services or products.
Why Revenue Leakage Matters
Revenue leakage is costly. Anywhere from 1% to 5% of earnings before interest, taxes, and amortization (EBITA) leaks unnoticed by companies. One survey by the Boston Group found that 45% of business leaders agreed that revenue leakage is a systemic problem facing their companies.
No industry or business is immune to revenue leak. According to a survey by MGI Research, 42% of companies experience some form of money leakage.
Revenue leakage impacts all parts of an organization, resulting in an inability to make accurate, informed decisions and hit revenue targets. Over time, it snowballs and can have serious repercussions on the job market and the economy, especially in periods of economic uncertainty when losses in overall revenue are more likely to lead to job cuts.
The impact to a company’s valuation can also take a hit; in fact, NYU’s Stern School of Business found that for high-growth enterprise organizations, every $1 of missed revenue can lead to a $5-$15 drop in enterprise value.
Not only that, but the lost money from revenue leakage impacts the ability to grow your business. SaaS businesses in particular will want to identify sources of leaking revenue and work to stop it, as they rely on this money to fund customer service, innovation, research, and growth.
Common Causes of Revenue Leakage
The first thing you should do to begin remedying revenue leakage within your organization is to identify the root cause or causes within your organization.
Revenue leaks aren’t easy to spot. (After all, if they were, they would have already been addressed.)
Some of the most common causes of revenue leakage include:
- Manual data entry. Although a common practice in many organizations, manual data entry poses inherent risks. In fact, one study by the Aberdeen Group found error rates of 12-15% in manual billing. Human error can lead to inaccurate pricing or discount application, missing billing information, data duplication or omission, and delayed billing can all lead to revenue leakage.
- Slipped deals. Deal slippage occurs when a deal doesn’t close within the expected timeline. While this is not necessarily uncommon, when deals are pushed to another quarter, month, or other time frame, it leads to revenue slippage. Slipped deals distort your sales forecast, leading to a domino effect that can have a detrimental effect on a business.
- Lack of a shared source of truth. Bad data is one of the most common reasons for revenue leaks. When data is pulled from a variety of different sources, you run the risk of making decisions based on outdated or inaccurate information.
- Discounts. Offering discounts is a tried and true method of attracting and retaining new customers. But discounts can be a major source of revenue leakage when multiple discounts are used by the same customers or if your system or internal teams continue to offer discounts after the promotional period is over. Even leaving a promotional banner on the website a few days past the expiration period can result in lost revenue.
- Customer churn. Losing customers due to dissatisfaction or inadequate customer retention strategies can lead to revenue leakage. Customers who feel they are not taken care of or who aren’t aware of your full suite of products or capabilities may look elsewhere. The cost of acquiring new customers is 5 to 7 times higher than retaining existing ones, so minimizing customer churn is essential to preserve revenue.
- Missed opportunities for upsell or cross-sell. Inadequate lead generation, ineffective conversion strategies, or improper customer segmentation may lead to missed revenue opportunities; for example, neglecting to send out renewal reminders to customers or not properly identifying a customer as an upsell opportunity in your CRM. Poorly targeted or executed sales and marketing efforts lead to revenue leakage.
How to Reduce Revenue Leak
Ultimately, revenue leaks occur because there are few ways to accurately measure leak. Despite 45% of business leaders agreeing that revenue leakage is a systemic problem,
- 73% of companies do not have automated revenue assurance processes
- 64% do not have standardized revenue assurance tools in their enterprise data systems
- 59% do not devote any full-time staff to revenue assurance
If your company doesn’t already have an issue with revenue leakage, it’s important to take preventative measures sooner rather than later. If revenue leak is already an issue in your company, identify the causes of the leaks and move forward with a plan of action.
Many of the things that fix revenue leakage will also prevent it in the first place. Some of the best remedies and preventions for revenue leakage include:
Automate your manual processes.
One of the most common causes of revenue leakage is errors from manual business processes. Automation is one of the fastest and most effective ways to prevent revenue leaks, as it minimizes risk, reduces human error, and helps your sales team focus on generating revenue rather than doing administrative work.
Software exists for pretty much any manual process you can think of, from helping to automate accurate quotes to automating steps in the sales and marketing process to generating invoices.
CPQ software in particular drives a more efficient revenue operation by automating a number of the manual activities in the sales process—many of which are prone to human error.
Automate your data capture.
Fragmented data can result in incorrect lead qualification and missed nurturing opportunities. If your organization is using different tools to capture data, and that data isn’t accessible by everyone, consider automating your data capture.
Automation tools can and should be used to not only capture data, but store it as a single source of truth (SSOT). Revenue platforms can pull data from a wide range of sources and store it in a SSOT. This ensures all information is accurate, up-to-date, and accessible to everyone.
Ensure data transparency.
Data transparency can help you identify potential slipped deals, so team members can regularly review them and look for deals that are at risk. Use tools that leverage AI insights, which can analyze your past and present data and turn it into actionable insights that allow reps to turn their attention to deals at risk of slipping, then take measures to correct before it can turn into revenue leakage.
Streamline communication and improve handoffs.
Moving a lead through the sales funnel is a cross-functional process that requires excellent communication and seamless handoffs. Failing to do so can result in lost leads and lost revenue; as many as 75% of B2B marketing leads do not convert to sales as a result of miscommunication. Marketing and sales automation tools become invaluable by helping to streamline the communication and handoff process.
Prevent Revenue Leak Now
Revenue leakage doesn’t have to threaten your company. In a recession (or the threat of one), smart leaders will continue to thrive by examining where they can automate their revenue process in order to keep more of the money the company has already earned.
A Configure, Price, Quote (CPQ) solution can help automate and standardize many outdated or manual processes while streamlining the entire quoting process. But your CPQ solution requires proper implementation in order for your organization to take advantage of its many benefits.
Let Pierce Washington help your organization implement CPQ to achieve tangible business results. We tailor CPQ solutions for your enterprise, educate on best practices, and advise on how CPQ implementation can work best for your specific use cases.