Revenue leakage is a term gaining increased attention as companies try to shore up all potential sources of income. Revenue leakage is defined as customers spending less money with their providers than anticipated over the course of the contract. For example, if a provider signs a $1 million contract but can only invoice for 50% of the contract value by the end of the term, they’ve experience revenue leakage of $500,000.
Reasons for Revenue Leakage
There are numerous reasons for revenue leakage, including:
- Changes in internal customer priorities, with projects being bumped lower in the priority queue or stopped altogether due to internal events, such as mergers or acquisitions.
- Changes in stakeholder support for the project due to new roles or because of shifting strategic alliances.
- A mis-match between solution expectations and deliverables, possibly due to poor communication or implementation issues.
- Discounts—both sanctioned and unapproved—along with promotions and rebates that lead to greater revenue leakage than anticipated.
- Unforeseen or unknown billing and invoicing errors.
A Leaking Bucket
Revenue leakage analogies usually involve water, with the concept often compared to a bucket. The bucket is the business and customers are the water in the business. To fix revenue leakage, firms have several options. They can:
- Plug the leaks (fix the issues that are causing customers to leave)
- Add more water to the bucket (acquire new customers)
- Throw out the bucket and get a new one altogether (walk away from the business and invest in a new one)
For most firms, fixing problems that are causing customers to leave is the most straightforward approach, especially if the issues are simple, relatively inexpensive, and uniform across the customer base.
Even when issues are more complex, plugging leaks (i.e., slowing or stopping customer defections) is typically the best course of action since acquiring new customers is considerably more expensive than retaining existing customers: In his LinkedIn post comparing customer acquisition and customer retention, Ian Kingwill includes statistics showing it typically costs between 3 and 30 times more to acquire a new customer than to retain an existing one.
Soliciting Customer Feedback
Knowing what issues customers are experiencing with your solution, your support team, and your organization overall is the first step in addressing revenue leakage. And to find out, many firms implement Customer Experience programs, which provide a mechanism for customers to provide their feedback on a regular basis.
At Primary Intelligence we apply the concept of revenue leakage to our Customer Experience programs because we believe clients must be aware of all facets of customer impact, including revenue they’re counting on that may not materialize. Understanding the underlying causes of revenue leakage, along with possible remedies—often found in customer feedback itself—can help to mitigate and correct revenue leakage, leading to improved financial health over the long term.
Are you tracking and analyzing your organization’s revenue leakage? Share your experiences below!