Revenue leakage in SaaS

Revenue leakage in SaaS is recurring revenue you are contractually entitled to but do not invoice or do not collect. It usually comes not from one big mistake but from small discrepancies between contract, billing and product usage that repeat every billing period. Because the revenue is recurring, so is the leak: an error of EUR 200 a month is EUR 7,200 after three years, without anyone ever having seen it.

Why does leakage work differently at SaaS companies?

At a project business, revenue leaks per project. You forget to invoice extra work, the project is finished, the money is gone. At SaaS companies it works the other way round. A leak starts at one moment, usually when a subscription is created or changed, and then runs on until someone stops it.

That has two consequences. The first is that the damage grows over time. The later you find a leak, the larger the amount. The second is that you will not find it by looking at individual invoices. Every invoice looks normal. Only when you put the invoice next to the contract and next to usage do you see that it is too low.

The general concept is covered in what revenue leakage is. This article is about the patterns that keep recurring at software companies. For the wider picture of how to connect CRM, billing and product data in SaaS, see Revenue Intelligence for SaaS.

What are the most common causes of revenue leakage in SaaS?

1. Usage above contract

The customer pays for 40 seats and has 55 active. Or pays for 100,000 API calls a month and makes 160,000. The product has no hard limit, because you do not want to block customers. That is a defensible choice, but only if someone also bills the overuse.

Where it goes wrong: the product measures usage, billing does not look at it, and customer success does see it but does not feel responsible for invoicing.

2. Discounts that never end

Sales gives 20 percent off the first year to get a deal over the line. A coupon is created in billing. That coupon has no end date, or an end date that does not match the contract. After year one the customer keeps getting the discount.

This is one of the hardest leaks to find, because the customer has no reason whatsoever to report it and the invoice looks consistent.

3. Missed price indexation

Many B2B SaaS contracts include a clause allowing the price to rise each year by a fixed percentage or in line with a published price index (for example the national consumer price index). That clause is rarely executed automatically. Someone has to enter the new price per customer in billing every year, and that does not happen, or only half happens. How that compounds is explained in revenue leakage from missed price indexation.

4. Mid-term upgrades without an extra invoice

A customer on an annual contract moves to a higher tier halfway through. The features are unlocked immediately. The pro rata extra charge for the rest of the contract year is not invoiced, because billing only looks at it at the next renewal.

5. Renewal at the old rate

The contract renews automatically. Billing renews the subscription with the same price, the same coupon and the same number of seats. The new price list, the indexation and the increased usage are not taken into account.

6. Failed payments that are not followed up

The credit card expires, a direct debit is reversed, an invoice stays unpaid. The account stays active. The dunning flow sends three emails to an address nobody reads. After three months the customer has used EUR 4,500 of software without paying anything.

7. One-off fees that were never invoiced

Implementation, training, data migration, an extra integration. It was in the quote, sales promised it, the work was done. But it is not a subscription, so it is not in billing, and nobody created a separate invoice.

8. Free accounts that were never converted

A pilot, a trial for a large prospect, a test environment for a partner. Agreed as temporary, in practice permanent. The account uses the product and pays nothing.

Where does it start in your organisation?

These leaks share a common cause: the moment an agreement moves from one system to another. In SaaS there are four such handovers.

Each handover is usually done by a person, often someone in finance or operations who creates the subscription from a PDF or a CRM record. The system does not check whether the input matches the agreement. So if you want to know where the leak is, you do not look at the systems, but at the handovers between them.

How do you find revenue leakage in SaaS?

You find SaaS leakage by asking four questions per customer. Do it first for your twenty largest customers. That is where most of the money sits, and where the chance of custom terms, and therefore of discrepancies, is highest.

1. Does the subscription match the contract? Compare unit price, number of units, term and discounts. Pay particular attention to discounts with an end date in the contract.
2. Has the indexation been applied? Look for a price adjustment clause in every contract and check whether the current price matches what the clause allows.
3. Is usage within the contract? Pull current usage from the product and put it next to what is being invoiced.
4. Has everything been paid? Look at unpaid invoices on accounts that are still active.

Those four questions find most leaks. The monthly version, in which you systematically align contract, billing and payment, is called SaaS revenue reconciliation.

Worked example: twenty large customers

Suppose you check your twenty largest customers, with a combined EUR 1.8M ARR. These are example amounts, intended to show the calculation.

• For 4 customers a first-year discount of 15 percent is still active, on an average of EUR 60,000: 4 x EUR 9,000 = EUR 36,000 a year.
• For 7 customers last year's 3 percent indexation was not applied, on an average of EUR 80,000: 7 x EUR 2,400 = EUR 16,800 a year.
• For 3 customers usage is 20 percent above contract, on an average of EUR 90,000: 3 x EUR 18,000 = EUR 54,000 a year, if the contract allows you to charge for that overuse.

Together EUR 106,800 a year, almost 6 percent of the ARR of these twenty customers. Not every amount can be fully recovered. A discount that has run for two years you will probably not charge back retrospectively. But you do stop the ongoing part, and that is profit every year from now on.

How do you prevent it?

Finding is the first step. Prevention is where the return is, because every leak you prevent never compounds.

Record discounts with an end date. Every coupon in billing gets an end date that matches the contract. No exceptions.

Make indexation a fixed process. Once a year, on a fixed date, a list of all contracts with an indexation clause and the new price per customer. Notify the customer in advance, as the contract requires.

Send usage to finance automatically. A monthly overview of customers above their contract, sent to the person who creates invoices, not only to customer success.

Check every new deal when it is set up. A second person checks that the subscription in billing matches the signed contract before the first invoice goes out.

Give failed payments an owner. Not just an automated email, but a task for someone who calls the customer if the payment is still open after fourteen days.

Give trial accounts an end date in the system. A pilot without an end date becomes a free customer.

What does it return and what does it cost?

The return on closing SaaS leakage is unusually predictable. Every euro you recover is recurring revenue with no extra acquisition cost and no extra delivery. The customer already uses the product. You are only billing what was already agreed.

The main cost is attention. A first round across your largest customers is a few days' work for someone who can read contracts and billing. Continuous monitoring requires a fixed process or software that does it. Which leak patterns exist in general, and what they look like, is set out on the use cases page.

Frequently asked questions

What exactly is revenue leakage at SaaS companies?

Recurring revenue you are entitled to under the contract, but that is not invoiced or not collected. Think of usage above contract, discounts that stay in place, missed indexation and unpaid invoices on active accounts.

Is churn also revenue leakage?

A customer who deliberately cancels is churn, not leakage. A customer who leaves because their payment failed and nobody followed it up is leakage. The distinction is whether the revenue was lost through the customer's choice or through an error in your own process.

Can I invoice missed revenue retrospectively?

That depends on the contract and on the relationship. Legally it is often possible, commercially it is usually wiser to correct the ongoing part and discuss the past. Check the rules in your jurisdiction, and leave the decision per customer to the account owner.

How often should you check?

Monthly for usage and payments, annually for indexation, and at every new deal or change for the handover from contract to billing. One big check a year does find the leaks, but only after they have run for twelve months.

Where do I start if I have little time?

With your twenty largest customers and the question of whether the subscription in billing matches the contract. That is where most of the money sits and where custom terms are most likely to have been copied over wrongly.