Find it and fix it before it turns into a disaster!
B2B companies often fail to notice revenue leak
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
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 However, price policy may become out-of-date in certain regions over time.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.
Once you find it, you can quickly fix revenue leakage to deliver in-year revenue and margin growth
You can also boost revenue and profit in your organisation by finding and fixing revenue leakage
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.