August 14, 2018

You Made the Sale, but Are You Leaking the Revenue?

By Justin Schweisberger

You’re well into the quarter and you have a big revenue number to hit. New sales have been slowing and your operating margin has become a bigger focus. So it’s more important than ever to ensure you’re fully leveraging your biggest revenue asset: your installed customer base.

You would think that’s an easy play; after all, these are contracted relationships already in the system and on sales’ radar. Yet the reality is, B2B firms lose massive amounts of revenue due to errors and process gaps that prevent sales teams from accessing important information like renewal events, price increase opportunities, and customer obligations.

Revenue leaks of up to 5 percent annually are commonplace; in large organizations, the losses can easily run into the tens of millions of dollars every year. Even the most sophisticated B2B organizations can find significant revenue leakage – and, thus, revenue potential – in their commercial relationships.

What Is Revenue Leakage and Why Does It Happen?

Revenue leakage is money lost from failing to capitalize on the full value of your existing contracted commercial relationships. Missed opportunities for price increases, over- or under-servicing customers, haphazard SLAs, over-discounting…these are just some of the common areas of your relationships where revenue leaks happen.

Revenue leakage is, at its root, a data problem. It results from an inability to access and act on the right information at the right time. Multiple acquisitions, highly negotiated contractual relationships, and business systems that don’t talk to each other all create bottlenecks in the crucial flow of information to sales teams.

Recouping Revenue: a Three-step Pilot

The good news: Identifying and eliminating revenue leakage can be a fast project. It doesn’t require significant changes to your sales process. And, because it doesn’t involve any additional cost of goods and services (COGS), it can deliver an outsize impact to the bottom line.

We have identified several best practices and practical steps you can leverage to build a pilot program to demonstrate the value of this approach. Here are the three steps we recommend:

1. Identify the revenue leakage zones that apply to your business. While every business is different, revenue leaks tend to turn up predictably in these seven process zones:

  • Renewal management. Understanding which relationships are at risk for non-renewal requires a laborious search through contracts, amendments, and associated documents. It’s hard to know where offering special incentives might be helpful, and you miss opportunities to expand the customer relationship. Result: excess churn.
  • Contracted pricing variables. Sales teams lack clear guidance on pricing, so they have to make decisions on the fly for new contracts. In current contracts, it’s hard to retrieve crucial information about already-negotiated price increase triggers. Result: stalled revenue growth.
  • Sales process productivity. Customer information is scattered across numerous systems and encased in the complex legalese of contracts. It’s often inaccurate and only sporadically updated. Reps have to spend a lot of time assembling and correcting it. Result: fewer deals processed.
  • Entitlement and billing reconciliation. It’s a challenge to compare actual usage of products or services with the contract. Agreements are hard to track, placing revenue at risk. Result: overcharged or undercharged customers.
  • Service obligations. Maintenance commitments and warranties are complex and hard to manage. Service-level agreements are so variable that you end up giving all customers the same service level regardless of pricing. Non-standard agreements proliferate, so it’s hard to get an overall idea of your performance. Result: unnecessary service penalties.
  • Expansion opportunities. You’re not sure what customers already own vs. what you could sell them. Result: Suboptimal upsell and cross-sell.
  • Deferred revenue. Payment terms are longer than necessary, so you defer far too much revenue. Result: delayed cashflow.

2. Segment your customer base. Now that you’ve chosen a leakage area to investigate, it’s time to figure out the areas of your customer base where you can have the biggest impact. You may want to start by looking at your top dozen or so accounts. Bear in mind, though, that those may already be receiving close attention. You may find more fertile ground for revenue leakage reduction in mid-market accounts in which commercial terms are negotiated, but which don’t have the same “swat team” support as, say, your top 20 customers.

Look for contracts coming up for renewal. Consider relationships that involve product sets or pricing structures that are complex or difficult to manage. Is there a strategic area of your business – one where you’re pushing hard to increase growth or profitability? That could be a good place to start.

3. Look for quick wins. Now you’re ready to assemble the relationship data for your chosen customer segment. Much of it will reside in documents such as contracts, amendments, order forms and statements of work, though you may also need to pull in information from your order and billing systems. Look through the data to find revenue uplift opportunities based on the leakage zones you identified.

Prioritize actions that deliver fast time to value. If you’re focusing on pricing variables, for instance, you may be able to apply already-negotiated, but previously overlooked, price increases based on the consumer price index or cost pass-throughs. If you’re focusing on renewal management, you might want to look at those coming up in, say, the next quarter.

Contract renewals are an excellent opportunity to re-negotiate unfavorable terms and conditions; make sure your sales or renewals teams have the right information on pricing strategy well in advance of the renewal event.

Once you’ve scored a couple of quick wins in your selected leakage area, you’ll want to extend the initiative to cover new zones and work toward making the elimination of revenue attrition part of your company’s DNA. Explore available technologies and partners who can help you quickly grow and maintain your gains.

Sales and sales operations pros work hard to build new revenue chains, and the last thing they want is to see a sizable chunk of that hard-earned income evaporate because of data bottlenecks and process glitches. They’re ideally positioned to lead an initiative to stop that from happening – and deliver a hefty boost to margins in the process.

Justin Schweisberger is the chief product officer at Pramata, which helps B2B enterprises digitize their commercial relationships to eliminate revenue leakage. Prior, he managed M&A activities for the Husch Blackwell law firm. Justin graduated from Harvard College with a BA in psychology.