Without the right fintech stack, subscription businesses can lose a lot of money without realizing. We’re talking about revenue leakage, and if you’re reading this, I assume you’re here to plug the holes in your proverbial bucket.
“A SaaS company is a leaky bucket full of ARR. Every quarter, Sales pours more water in the bucket. Every quarter, Customer Success tries to keep water from leaking out of the bucket,” explained Dave Kellogg, leading technology executive and angel investor.
This article will focus on the most common sources of subscription revenue leakage and how to patch them up. Let’s start by addressing what revenue leakage actually is.
Revenue leakage refers to money earned but not collected
Basically, it’s when a bill for services rendered remains unpaid, through a lack of awareness from the business, the customer, or both. And despite revenue leakage accounting for a 9% loss in monthly recurring revenue (MRR), 59% of businesses surveyed by Boston Consulting Group don’t dedicate any full-time staff to revenue assurance or have an effective software solution in place.
What’s worse, with subscription SaaS, billing errors compound recurring revenue leakage. Revenue leaks cost your business more and more over time—which is why it’s important to take action sooner rather than later.
So without further ado, let’s take a look at the first revenue “hole”…
1. Allowing customers to churn involuntarily
What it is:
Also known as passive churn, involuntary churn is when customers churn out with no active intention to do so. For SaaS businesses using a subscription-based billing system, the number-one reason it happens is payment failure.
As FlexPay CEO Darryl Hicks points out, almost half of churn is because of failed payments, so it’s a significant problem to fix. The good news? There’s a boatload of revenue waiting to be recovered.
Some of the most common causes of declined transactions are:
- the card has expired and the customer hasn’t updated it,
- insufficient funds,
- a technical communications error with the bank, and
- fraud protection.
Involuntary churn could also be caused by customers forgetting login details or missing deadlines for manual renewal. However, your subscription management solution should make the renewal process automatic.
Why it’s important:
Aside from the immediate loss of revenue, churn costs your business in many other ways. Consider the sunk cost of acquisition. It costs five times more to attract a new customer than to keep an existing one.
Then there’s the negative impact on cash flow. You’ll also lose future recurring revenue, reducing customer lifetime value (LTV). Finally, the whole process is likely to damage relationships with customers who have to deal with the inconvenience.
Plugging leaked revenue from involuntary churn improves your revenue retention, which is widely recognized as the most important metric for SaaS business health. A recent survey of more than 1,500 private B2B SaaS companies shows that increasing net revenue retention (NRR) by just 10% can improve growth rate by up to 30%. In fact, each percentage point increase in NRR is worth an 18% increase in SaaS company valuation over five years!
As Josh Pigford, founder of Baremetrics puts it: “If churn isn’t in the single digits, it’s the only thing you should be focusing on.”
How to fix it:
Luckily, a few changes in your business processes can help to recoup this lost revenue.
Firstly, implement a credit card retry schedule. Simply running the card again a few days later is often successful and can recover huge amounts of revenue that otherwise would’ve been lost. VISA’s latest rules state that you can retry payment up to 15 times in a 30-day period.
Credit card auto-updater services can help to plug revenue leakage, too. Most reputable automated billing service providers offer this revenue-saving feature.
Being proactive with dunning communications will also prevent revenue leakage. Many businesses send a renewal notification a week in advance. Or, even earlier—today I actually received an email from NordVPN reminding me that my annual renewal is due in 30 days. A simple communication like this prepares customers for an upcoming charge and can prompt them to update payment information.
You could also use an in-app notification, like a banner, to remind users their plan is about to expire. Note that this works best for annual subscriptions, as seeing a notification more frequently could get annoying.
An in-app method in tandem with a grace period works well to reduce revenue loss, too. Once the customer’s grace period is over, put a banner or in-app paywall to prevent access to the app or their data.
If polite emails or texts didn’t get their attention, a paywall certainly will. Just be careful what kind of customers you use this method with. Users aren’t always the ones responsible for paying the bills, especially in B2B SaaS, and you don’t want to create a bad user experience.
2. Improper processes for charging taxes
What it is:
In the U.S., every zip code can have different tax requirements. There are more than 14,000 tax jurisdictions nationwide! Frankly, it’s a tax-tracking nightmare. And that’s just the U.S.—for global businesses, the stakes are even higher.
To add to the confusion, SaaS is often seen as a bit of a grey area and digital tax laws are constantly evolving. It’s basically impossible to manage such a complex task with manual processes. Charging the wrong taxes can mean paying the difference out of your business’s pocket, causing a major loss of revenue.
Why it’s important:
Tax is one of the revenue leakage points with potentially huge associated financial damage. Of course, revenue leakage affects your bottom line. But when it comes to compliance, regulators and auditors do not mess around. Your business may need to pay penalties and interest of up to 140%, plus three times the tax you owe as damages. You may even be accused of defrauding the state.
One stunning example of this was when Newegg, a major e-com retailer, failed to charge sales tax to its Connecticut customers. In a bizarre move, Newegg provided customers’ data to the Connecticut Department of Revenue Services, who then contacted them directly. Understandably, customers were furious. Newegg suffered huge damage to its reputation as well as loss of revenue and legal repercussions.
How to fix it:
Thankfully, there’s a simple way to avoid losing money through tax-related revenue leakage. All you need to do is implement a billing solution that either handles such detailed calculations natively or integrates easily with a taxation software that does.
That way, you can avoid any nasty surprises—especially under-billing for sales tax!
3. Human error
What it is:
Revenue leakage can also occur as a result of manual error—data entry errors that include things like typos in billing information. Administrative tasks, like manual data entry, are a main cause of revenue leakage.
Managing data on multiple different systems makes your business prone to data synchronization errors. When there’s no single source of truth (SSOT), staff in various departments may be working off old, inaccurate data. Jumping between spreadsheets is a common culprit when it comes to revenue leakage.
Why it’s important:
Bad data at any stage of your revenue cycle management can disrupt cash flows to your business.
A revenue leak could happen when a deal slips through the cracks—it could come down to something as simple as a lost email or other clerical error. And pricing errors in the system could spell revenue leakage before you’ve even begun the billing process.
How to fix it:
Automation is the way forward. A cloud-based billing automation system can act as your business’s SSOT for accounts receivable (AR) data, so everyone’s on the same page—literally.
Setting up customers and subscriptions is a set it and forget it process—you only have to do each once and never worry about it again.
An automated solution lets you send out invoices accurately and on time, even when the amount and billing frequency change. For example, a customer on a mid-tier annual plan switches to a usage-based monthly plan. Processed manually, the potential for revenue leakage and revenue errors is significant. Especially considering the extra admin to correctly recognize revenue. An automated system can handle all the changes with ease.
How to prevent revenue leakage
A significant amount of revenue can be lost from these 3 causes of revenue leakage. But, the positive spin is that this revenue is waiting to be recovered! As is the case with most things, however, prevention is the best cure.
An automated billing solution is the medicine your SaaS business needs. It takes the strain off of manual processes and allows you to focus more energy on customer success and growth-promoting activities.
“Customer success is where 90% of the revenue is”Jason Lemkin, SaaStr.
Plug revenue leaks with automation
When you want to optimize your financial flows and unlock growth potential, automation is the key. Real-time reporting makes it easier to track your aging receivables and take action. Smart dunning features cover revenue leaks you didn’t even know you had. Adaptable pricing capabilities empower your sales and success teams to maximize up-sells, cross-sells, and even down-sells to reduce churn. Your billing and invoicing system can operate with laser accuracy and take a fraction of the time.
Ultimately, automation seals those pesky revenue leaks and gives you total revenue assurance. Looks like you’re gonna need a bigger bucket.