The SaaS business model has long been glamorized for its sweet promise of monthly recurring revenue. But there’s a downside that isn’t talked about as much.
While your revenue recurs every month, preventable loss of revenue, AKA revenue leakage, also tends to be a recurring theme. Imagine that:
- your accounts receivable (AR) team issues an invoice with an error or
- a customer’s payment fails because their credit card number has changed.
Neither of these issues is likely to affect your SaaS business only once. With the recurring nature of the SaaS model, you’re going to experience preventable revenue loss every billing cycle.
In fact, Nikolaas Vanderlinden, Executive Director of Advisory at EY estimates businesses lose between 1% and 5% of their earnings before interest, taxes, depreciation, and amortization (EBITDA) without even noticing it.
So if you’re here because you’re feeling that revenue leakage, chances are it’s pretty significant.
But how can you plug these revenue leaks? All you need are the right processes and tools in your fintech stack.
Reduce failed payments
Improve customer retention and keep existing customers happy: this is what customer success teams aim to do at SaaS companies worldwide. But the reason for churn isn’t always related to customer satisfaction (or a lack thereof).
SaaS businesses also experience a phenomenon referred to as involuntary churn, when users who would otherwise continue being paying customers are kicked out because of failed payments.
Some SaaS businesses have a setup that automatically bars access from the product when a payment is late. For others with manual back office processes, though, someone has to manually disable the customer’s access to their account. And depending on how many other manual tasks are on this employee’s plate, this might not result in immediate churn but in a customer maintaining access to your product without having paid.
By getting ahead of failed payment issues before they happen, you can prevent both involuntary churn and revenue leakage.
Implement a credit card retry sequence
You charge a customer’s payment card and it doesn’t go through. What do you do?
A surprising number of SaaS businesses do absolutely nothing and resign themselves to either premature revenue churn or leakage. Meanwhile, simply retrying a customer’s card after an initial failed transaction can recover an average of 32% of payments that originally fail.
That 32% can be really significant—we’ve seen automated retries recover over $300,000 for a single customer over the course of a year.
Auto-update expired payment methods
Every three to four years, credit cards expire and are reissued with new expiry dates and CVC numbers. For a business to continue charging the card on a subscription basis, these details need to be updated.
Many SaaS businesses deal with this by sending a communication to prompt the customer to make this update manually. But the major credit card brands offer an easier way to make sure your customers’ payment methods never lapse: they offer an auto-updating service to take the manual work out of the entire process. Some payment gateways have this service baked into their fees, as well.
Keep an eye on aging accounts receivables
The more business intelligence you can incorporate into your daily processes and high-level decision-making, the better. With a report that shows, at a glance, how many accounts have outstanding invoices due within terms vs. way overdue, your leadership team can easily glean an accurate picture of the state of the business’s finances.
And if one of your enterprise customers—you know, the ones with the giant customer acquisition cost and correspondingly sizeable annual recurring revenue?—has an outstanding invoice, your AR team can easily prioritize the follow-up.
Automate everything you can
Manual-heavy financial management processes can also cause significant revenue leakage in your SaaS company. Think about the project management work, the potential for human error, and the sheer time it takes to manually:
- create and send invoices,
- manage dunning communications and collections,
- pro-rate subscription charges,
- balance ledgers, and
- handle ASC 606 revenue recognition.
Automating these processes, though, can reduce time spent billing by up to 90% while virtually eliminating the possibility of manual error.
“[Businesses can] improve accuracy and due diligence with auto-accounting and auto-reconciliation. Automation makes this possible as it eliminates manual intervention that is required for matching transactions with invoices,” says Deena Jacob, co-founder and CFO of Open Financial Technologies.
“Digital automation can offer SMEs to embrace operational efficiency. While switching from manual processes to automation, companies should focus on picking the right tech that is agile enough to suit the needs of their business.”
Have a dedicated SSOT for your AR data
If your software company doesn’t have a single source of truth (SSOT) for its AR data, your business has a revenue leak waiting to happen.
Say your AR team has a master spreadsheet stored on a shared drive. All it takes is a typo or one person accidentally saving a version to their desktop and suddenly the whole team is working off incorrect data.
“Another example is that prices are invoiced that have since been adjusted (for example, in e-mails between the purchasing department and the supplier), but the financial departments of both companies know nothing about this and so have continued to use the old prices,” says EY’s Vanderlinden. “Or sometimes, they just use incorrect prices.”
Long story short: without a centralized source of truth, there are too many places for revenue to slip through the cracks.
“A company with SSOT relies on one and only one point of reference for the latest, aggregated information,” Shashin Shah, founder and CEO of Pimcore Global Services says. “This way, every entity in an organization bases business decisions on the same data. It can revamp complete business operations.”
For a SaaS business, an SSOT for accounts receivables may take the form of an end-to-end subscription management software that houses your subscription and customer data in a cloud platform, easily accessible by everyone who needs it.
Shah concludes: “Without a single source of truth, datasets exist in siloes, and each department operates as a black box. The obvious result is the high probability of data inaccuracies and redundancies. Data can be modulated, copied, and updated in many ways and periods. SSOT overcomes this barrier to fast-paced digital business and next-generation workforce.”
Modern SaaS billing software plugs revenue leaks
The problem is complicated but the solution is simple—don’t you love it when that happens?
Despite all the great things about the business model in the SaaS industry, revenue leakage can come from dozens of different sources. But modernizing your AR processes with the right fintech tool is a relatively quick fix that can make a huge difference in the amount of revenue your SaaS business gets to keep in its coffers every month.
Subscription management software can:
- automate invoice management,
- function as an SSOT for all of your subscription and AR data, and
- help you build an automated collections process with dunning communications, payment retry schedules, and credit card auto-updating.
Curious to know how much revenue your SaaS business could recover after switching to an automated recurring billing and subscription management solution? Check out our ROI calculator!