Revenue leak is a slow puncture - and companies often miss it
Revenue leak is a slow puncture - and companies often miss it

Revenue leak is a slow puncture – companies often don’t see it 

Find it and fix it before it turns into a disaster!

B2B companies often fail to notice revenue leak 

B2B companies sell their products or services at different prices to different customers. This price variation is often necessary. Price for the same product could vary due to different order size, customer size or local competition. However, sometimes a B2B company may sell the same product at different prices even across similar orders and customers. A company leaks revenue when it offers a price discount for some orders while it offers comparable orders at a higher price

Management looks at aggregate numbers and not individual sales orders. As a result, revenue leak can go unnoticed especially when overall sales are growing. However, revenue leak could account for up to 5% of lost revenues. This would translate into 5 percentage points of lost profit. (Read this article to understand the relationship between revenue increase and profit increase)

Lack of market insight and gaps in price governance cause revenue leak 

Market price tends to be opaque in B2B. Sales team receive high-level competitor price intelligence from their product and marketing teams. However, competitors and their prices can vary significantly across territories. As a result, exact price intelligence is usually missing for individual sales transactions. Against this backdrop, B2B customers tell you that your competitor has better prices. Due to the lack of specific intelligence on market price, the salesperson is tempted to discount the price to win the sale. As we will describe below, this discount may often be more than necessary and cause a revenue leakage.

Excessive price discount due to perceived competition

The second cause of revenue leakage is a gap in price governance. All B2B companies have a price policy and an authorization matrix for approving exception prices. However, price policy may become out-of-date in certain regions over time. This can lead to an increasing number of requests for approving price discounts. If a company is processing thousands of orders, it may run out of time to scrutinize each price approval. As a result, smaller orders often get the exception price approved without detailed scrutiny. In doing so, companies miss an opportunity to avoid excessive discount.

Data-driven approach is essential to pin-point revenue leakage 

Gaps in competitive price intelligence and lack of governance can lead to unnecessary price discount as described above. But no B2B company can ever have exact price intelligence for each competitive bid. So how do you figure out when the price discount is right vs when is it excessive?

If you assess individual sales orders from the past for excessive price discount, the results will be inconclusive. This is because you would not have the exact market price benchmark for evaluating a specific transaction.

However, you can build a robust proxy for the market price for each order by conducting a peer group analysis. A peer group is a group of similar-sized orders across like-for-like customers. A company can define its criteria for forming peer groups. For example the criteria can be orders of a certain size, for customers of a particular segment in a particular region. Be aware that a B2B company can have 100s of such peer groups. Since the orders in a peer group are comparable, you would expect each order to fetch a similar price.  This price becomes the benchmark ‘market price’ for each order in the peer group. Orders with a price significantly below this peer group market price are clear examples of excessive discount. Thus these orders leaked revenue.

 
Establish peer groups of orders to compare price performance

Modern analytical tools allow B2B companies to rapidly construct peer groups and pinpoint orders that leaked revenue

Once you find it, you can quickly fix revenue leakage to deliver in-year revenue and margin growth 

A leading B2B services company was facing margin erosion and believed it was due to competitive pressure. However, our peer group analysis pin-pointed specific orders that were leaking revenue due to excessive price discount. The peer group analysis also uncovered errors in invoicing e.g., incorrect invoice for spares and travel. In total, we found 4% of addressable revenue leakage – equivalent to 400bps of margin increase! The company was able to address a large proportion of this leakage in a matter of weeks. E.g., price correction on small value contracts, fixing invoice errors for spares and travel. The peer group analysis and benchmark ‘market price’ also offered a big benefit for new business. This gave the sales team added market insight and confidence to negotiate a higher price for upcoming orders.

You can also boost revenue and profit in your organisation by finding and fixing revenue leakage

Have you analysed price performance using peer groups in your company? If not, it is very likely that revenue leakage has gone unnoticed in your business too. 1-2% revenue leakage is typical, though it could be as high as 4-5%.  Addressing 1% revenue leakage will give you a 100 bps profit improvement. That is substantial in the highly competitive world of B2B! 

As described above, once the revenue leak is pin-pointed it can be fixed quickly. The challenge is in building the peer groups and running the analytics to pin-point the revenue leakage. To start a conversation on how you find and fix revenue leak in your organisation, please submit your email id below. Feel free to also take our pricing self-assessment here

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About the author:

 

Kedar Gharpure is the Director of B2B Growth Consulting Ltd. He has served heads of several Fortune 250 and Private Equity owned B2B companies on growth strategy and commercial transformation.

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