Our Guide to Revenue Leakage
Fortunately, it's often possible to prevent or correct the worst kinds of revenue leakage. You just have to be willing to identify and face the problem. So, what is revenue leakage and how do you identify it? Even better, how do you avoid this issue in the first place?
In this post, we'll answer all these questions and more, so that you can avoid the experience of revenue leakage.
Revenue Leakage Definition
Revenue leakage refers to the preventable loss of revenue from your company. Depending on the how your business operates and the product or service you offer, these losses can come from a variety of sources.
For example, for service-based businesses, underbilling customers for services is a common source of revenue leakage. For ecommerce companies, often a large source of revenue leakage is cyber fraud. For both these kinds of companies, unchecked sales discounts and data entry errors can also result in revenue leakage.
Revenue leakage is no small issue, as evidenced by the massive and growing size of the global revenue assurance market. Moreover, while estimates vary, most companies lose up to 5 percent of their earnings to revenue leakage.
How to Identify Revenue Leakage
The first challenge in preventing revenue leakage is identifying its potential sources. However, it's not enough to simply find a revenue leak and fix it. It's a problem that manifests in many ways, so you have to address the root cause.
Your first step, then, is to establish a reporting system for identifying potential revenue leaks and alerting the relevant stakeholders. To do this, you must focus your attention on the areas of your business that may be leaking revenue.
Areas you might look at include:
- Billable hours worked vs. billed hours
- Credit card chargebacks
- Product returns
- Sales discounts
- Fraudulent transactions
As mentioned earlier, different types of companies face revenue leakage from different sources. Therefore, as a starting point, it will help to familiarize yourself with how revenue leakage typically manifests in your industry.
After that, you'll need to dig deep into your business to find the current and potential sources of leakage. With that insight, you'll be well-equipped to expand your reporting capabilities to quickly identify sources of revenue leakage.
It may also make sense to revisit the mix of technology you’re using to report on revenue leakage. Many revenue assurance tools are designed specifically for certain industries. As you grow, these tools become increasingly valuable.
Of course, identification, while very important, isn’t enough by itself to protect you from revenue leakage. In the next section, we’ll present several ways you can prevent this problem.
3 Way to Prevent Revenue Leakage
Exactly how you prevent revenue leakage will depend on the source of leakage. That said, there are several common themes that are independent of industry or business. For example, errors in data entry—which are common in all businesses—often cause failures in billing processes.
Keeping in mind that there’s no one-size-fits-all approach to revenue leakage, we’ll outline a few preventive measures you could take.
1. Automate manual processes to reduce human error
Whenever you, or one of your employees, has to enter data manually, there’s room for error. By automating some or all of your billing processes, though, you close the door on human error. Of course, it’ll take time and resources to accomplish this, but the time and revenue savings can be well worth it.
2. Improve online product information to limit returns
If you’re selling goods online, providing your customers with the correct product information is critical. Not only does it help those products sell, but it also helps limit the kinds of misunderstandings that lead to costly returns.
3. Use an ERP to audit and control your discounting policy
Discounts are a powerful tool to stimulate sales. Left uncontrolled, though, excessive discounting can lead to significant leakage. This makes it critical to keep a close eye on how often and to what extent salespeople are using discounts.
Unfortunately, that’s easier said than done; unless you have an effective Enterprise Resource Planning (ERP) system, it’s very time-consuming to audit costs and sales, including discounts. With a good ERP though, in addition to easily auditing sale discounts, you can prevent discounts that go against your policies.
Bottom Line: Devote More Resources to Revenue Assurance
When BCG surveyed more than 2000 business leaders, 45 percent said revenue leakage was a systemic problem their companies faced.
Perhaps unsurprisingly, almost 75 percent of that group didn’t have automated revenue assurance processes. 64 percent had no standardized tools and 59 percent devoted no full-time staff to preventing revenue leakage.
The unfortunate reality is, if you want to prevent revenue leakage in the long term, you have to invest in preventive measures. While your company may not have the scale (yet) that makes a full-time hire necessary, some level of investment has to be made.