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Revenue leakage in SaaS companies means the unnoticed loss of revenue. Here are the causes of revenue leakage and ways to prevent it.
For any SaaS business, it is dreadful to lose revenue. The loss is always not due to external or major damages. The small leaks that are often unnoticed lead to huge losses. Many companies cannot even fathom the percentage of revenue leakage. A steady drip of losses creates huge losses in a SaaS firm. Recurrence is the most important thing in a SaaS business and when the revenue drips, the leakage is huge. Let us know all about revenue leakage in SaaS, causes, prevention of revenue leakage and more.
Revenue leakage is the loss of revenue from your company that goes unnoticed. It occurs due to wrong billing or under-billing. As per statistics, you can lose between 1-5 percent from revenue leakage. This can add upto significant loss of revenue in the long run.
Self-service is common in a subscription economy. Organizations cannot put a value on these entitlements. This can be either overcharging the customer or undercharging them which can lose out on revenues.
Renewal is the base for ARR and MRR. However sometimes contract renewals can be a source of leakage. When the customer defaults on payments due to missing contract renewals, there can be loss of revenue.
SaaS companies offer interesting discounts to customers based on services and products chosen. Customers may downgrade the subscription rendering the discount waste. This is revenue leakage since customers benefit from the discount after being downgraded.
Service obligations failure has a direct impact on revenue. The transaction price is based on the contract performance. For example: When the product meets only 85% of client requirements, customers will be dissatisfied. This will lead to problems during billing and lead to revenue leakage.
Individual customer records show cash flows. Cash flows are hit when the credit period keeps increasing. Also, monthly revenue costs can be realised only when dome obligations are made.
Every free trial does not mean they will become a customer. When the system does not limit this free trial system, chances of multiple customer trials are more. This can result in the customer using the product without actually paying for it.
Forceful churn is an unintentional revenue leakage. Often customers accounts are suspended or payments get declined, this leads to forceful churn. When risky customers are tough to find, they might be churned out by the system. This deficiency can lead to loss of right customers.
Apart from this, system inefficiencies can also lead to revenue leakage in SaaS firms. Some of the errors are-
Prevention of revenue leakages is necessary in a SaaS business. To prevent revenue leakage, there are some aspects to be kept in mind.
Customers will buy new products or licenses or may even pause the subscription. If you are unable to track, capture, analyse these changes during the customer life cycle, you will lose revenue. So you need to account for contract changes to prevent and plug revenue leakages.
If you are using an old method to track recurring revenues, you can be leaking more revenue than you imagine. Misplaced decimals, extra zero, or a simple error made manually can impact revenue leakage hugely. These errors can lead to huge losses that are due to pricing issues.
SaaS businesses need to build controls around revenue leakage points, these can be in the risk analysis part of the Q2C process. They need to control the auto-renewal process to reduce forced churn. SaaS companies need to control and mitigate repeated trials.
A SaaS business deals with multiple customers and it is important to automate the subscription billing process. From generating an invoice to leveraging technology and smart tools, businesses need to look for smart means to billing problems.
When a customer base grows, chances of revenue spilling also increase. SaaS businesses must identify small leaks to combat huge losses. You need to optimise your billing software to combat churn that is unintended.
Switching your renewal types can also impact revenue leakage. Churn in manual account renewals starts from 35 % percent and for automatic monthly renewals its 1%. It is also convenient for customers who find it hassle-free and easy to proceed.
There are a number of revenue recovery tools that can help with churn even if its involuntary. They can help with cards about to be expired, account updaters and more. You need to build a process that will help with retry, dunning management, and payment re-routing. Another option is by having a revenue management tool that will help you analyse loopholes and craters in the SaaS business.
A revenue leakage expert is one who has high insight and specialised understanding of business processes. They need to have skills in research, diplomacy, and process. Like an expert plumber, the revenue leakage expert needs to recover leaked money. They need to focus on repairing leaked money and detect issues that may arise. They also need to take care of specific controls that prevent money leakage.23
With a standard revenue leakage program, it is possible to increase the company’s profitability. Revenue leakage needs to be handled as it can lead to lot of loss. There should be good communication among teams which can reduce the scope of revenue leaks. If the leakage is due to miscommunication, it is possible to handle it. You can have a recurring billing software that will streamline issues such as churn, loss of revenue, and other unnoticed details.
Published 26 Apr 2021, Updated 6 Jul 2022
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