Revenue leakage: it’s something you want to avoid, but what is it exactly? And how can you stop revenue leakage from draining your profits?
In this article, we'll be giving you the rundown on revenue leakage - why it happens and how to prevent it in the future.
- What is revenue leakage?
- Why does revenue leakage matter?
- Common causes of revenue leakage
- How to prevent revenue leakage
- Wrapping up
Let's jump straight in 👇
What is revenue leakage?
Simply put, revenue leakage is revenue that is earned but has vanished.
Revenue leakage refers to a loss of revenue due to weaknesses in a business’s revenue management processes or other unnoticed causes.
It can occur for many reasons, including pricing errors, incorrect billing, lack of (or underused) resources, overdue debts, and even fraudulent activities.
Revenue leakage can be sneaky, and that’s because it happens in little bits at a time, meaning it often goes unnoticed.
Picture it like this: imagine you have a dripping faucet that keeps dripping faster and faster until one day, you have a flooded kitchen.
That’s what revenue leakage does - small revenue leaks add up and eventually lead to BIG problems down the line. 💧
Don’t be mistaken; any business can suffer from revenue leakage - it’s not just small or poorly run businesses - any business with multiple salespeople or multiple products is susceptible to it.
Research suggests that 42% of companies experience revenue leakage.
One plumbing analogy later, and we’ve defined revenue leakage, but what is the actual damage that revenue leakage can do to your business?
What’s the big deal with revenue leakage?
‘Leak’ doesn’t exactly imply a good thing - and that’s because it isn’t.
But what makes it such a big problem that you need to avoid?
One of the biggest problems with revenue leakage is that it can be tricky to detect.
In many cases, leakage results from minor, unnoticed errors or oversights. However, small issues can add up over time (remember our dripping faucet?) and result in significant losses for a company.
Research suggests that between 1 to 5% of EBITA is lost to revenue leakage.
But it’s not only revenue that leakage can affect; it’s also your company’s reputation.
An unnoticed error can damage a company’s reputation, making you seem unreliable or unprofessional. This can lead to customer dissatisfaction, especially if your customer feels they aren’t getting what they paid for.
In some cases, revenue leakage can lead to legal problems.
We agree that revenue leakage is NOT🚫 a good thing, so taking proactive steps to prevent it and improve your revenue management process is essential.
So, we’ve learned what it is and that we don’t want it - but what causes revenue leakage? 👇
Common causes of revenue leakage
There can be many reasons for revenue leakage; let's explore some of the main causes, and what you can do for each:
Pricing errors are a common cause of revenue leakage. Overcharging or undercharging your customers can cause significant gaps in your revenue.
Another way inaccurate pricing can cause your business problems is if you have not accounted for product demand; ask yourself:
❓How saturated is your market? Have you adjusted your price accordingly?
Not taking account of the market and pricing your product too high can alienate your customers, and positioning your price point too low can lead to you missing out on untapped profits.
Making sure you keep the market in mind will help you find that sweet spot and keep as much revenue as possible.
Other factors to keep in mind with inaccurate pricing:
- Discounted prices - has a discount gone on too long? Are the wrong people being included in your discount schemes?
- Promotional periods - has your promotional period gone on too long?
- External market factors - has the wider market changed? Keep an eye on the external environment and change your price strategy accordingly.
💡Review your pricing strategy and keep an eye on moving markets to avoid leakage and maximize your business’s revenue.
Billing and invoicing errors
Billing and invoicing errors can result in lost revenue, especially if customers dispute charges or fail to pay on time.
Errors in invoices, such as incorrect billing information or inaccurate product or service descriptions, can lead to confusion and payment delays.
Tailoring billing can also create a lot of problems for your revenue management.
Pricing should be the same across the board (except for easy, set tier pricing, for example, ‘bronze,’ ‘silver,’ and ‘gold’ packages). Having tailored pricing for each customer can waste resources, jeopardize revenue, and make forecasting challenging, especially with billing coming in at different intervals.
Manual invoicing can also create many problems; human error bleeds into missed figures & a loss in profits.
Also, if your invoices aren’t dispatched as the sale takes place, things can be omitted, such as add-ons. Using an automatic invoice process, provided by implementing software, means you don’t suffer.
💡Top tip: simplify your billing and invoicing, keep it consistent, and keep revenue coming into your business simultaneously. A good way to do this could be to download software that presents billing in one centralized place.
Forecasting can cause a lot of problems if it’s not done right. Without proper forecasting, you could be left with excess product, especially if you’ve not taken account of market trends (which we spoke about earlier).
Overestimating product success without looking at all the available data can lead to your targets not being reached and profit shortfalls.
👇Here are some great ways to make sure your forecasting stays in shape:
- Analyze past data
- Keep in mind market trends
- Conduct customer surveys
- Use market analysis tools
- Survey customers.
No one likes to think about fraud happening within their business, but unfortunately, this can be a direct cause of revenue leakage - so we need to take a look at it.
If your employee submits a false invoice for payment, you could be paying for goods or services you never received. To double the blow, you might also have to reorder the materials & supplies again.
To make sure fraud isn’t happening under your nose, you should use fraud detection measures to prevent it.
❗️Keep reviewing your invoices and pay attention and investigate any irregularities.
Poor data management/systems
Without transparent data, it’s really tricky to understand your business’s revenue, and that’s where revenue leakage comes in.
Monitoring your data helps you track your customer journey and identify gaps in your selling process.
Pulling different data sets from siloed departments makes having a well-rounded view of a company challenging; that’s why sharing data is so crucial to preventing revenue leakage.
By sharing data and tech and increasing communication, you can limit the chance for revenue leakage to creep in and make sure you can spot when discrepancies come up. Learn more about sharing data with your team here.
💡Adopt high-quality software and systems to ensure you can track data easily and will also help avoid the other problems we’ve discussed. For example, invest in tools that track customer purchase history, invoices, and other critical financial data.
How to prevent revenue leakage.
We’ve already discussed some things you can avoid and things to implement to help make revenue leakage less likely, but let’s take a look at a few other things you can do to prevent revenue leakage.
- Figure out the problem: the first step is identifying what’s causing your revenue leak. This can be tricky - cover your bases with the steps we recommended earlier, create various hypotheses, and ask those in revenue positions.
- Conduct regular audits. Regular financial audits can help speed up identifying a revenue leakage. Revenue leaks are the most dangerous when they go unnoticed, so adopting regular financial audits will help identify discrepancies or errors in your revenue management process.
- Tighten financial controls. Strong financial controls can help prevent revenue leakage as they reduce the risk of fraudulent activities. Another way to help this is to create a two-step financial controls process, meaning two sets of eyes look over the data, limiting the likelihood of fraud and human error.
- Streamline your billing processes. Inefficient billing is an easy way to have leakage and streamline your process to identify and address any inefficiencies. Keep your billing process automated; if you’re at the start of your business, try to avoid tailored pricing and invest in software that can make the process easier & fault-free.
- Monitor vendor contracts. Keep reviewing vendor contracts and renegotiate regularly to avoid overpayments and excess charges.
- Implement revenue recognition policies. Clear and consistent revenue recognition policies can help prevent revenue leakage as they can help prevent revenue leakage by ensuring that all revenue is properly recorded and recognized.
- Train your employees. Educate and train employees (especially those directly involved in creating revenue) on revenue management processes and the importance of preventing revenue leakage (maybe send them this article). This can help ensure that employees are aware of their responsibilities and can identify any potential issues that come up.
- Monitor customer accounts. Regularly monitor customer accounts to identify any irregularities, such as underpayments or overpayments. Tidying your billing process will also help make this easier & make checks more accurate.
Revenue leakage: a summary
No one likes a leak, especially one that directly affects your business. 💧
We’ve run through a few ways to avoid revenue leakage and things to implement to prevent it in the future, but if we had to summarize avoiding revenue leakage in one word, it would be: review. 💡
Keep reviewing your processes, pricing strategy & data management. Invest in software to help automate this process, but keep familiarizing yourself with the day-to-day data of your business to help you spot leaks 🔎.
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