What is service revenue and how to calculate it?

For some businesses, service revenue is the company’s lifeline and sole source of income. For others, it makes up only a small percentage of the total cash inflow.

In any case, understanding what service revenue is, how it impacts financial statements and operational capabilities, as well as how to maximize it, is critical.

In this article, we’ll explain exactly that. Let’s get into it.

Service revenue definition

Service revenue is the income a business earns from providing services to its customers.

It's distinguished from product revenue, which comes from selling tangible goods. Service revenue is generated through activities like consulting, maintenance, education, repairs, and other intangible deliverables.

For some companies, all of their revenue is service revenue. A digital marketing agency, for example, doesn’t sell a physical product. All of the digital advertising, SEO, and social media campaigns it runs are services, so all of its income is service revenue.

For others, only part of the company’s income is service revenue. For instance, an appliance retailer may make most of its revenue selling fridges and dishwashers but also generate a comparably smaller amount of service revenue through maintenance and servicing packages.

Importance of service revenue for businesses 

Why is service revenue important for businesses?

Here are four critical reasons:

1. Primary income source. For service-oriented businesses, service revenue is the primary or only source of income. It's the backbone of their financial model.
2. Recurring revenue streams. Many services are offered on a retainer or subscription basis, which can improve cash flow by adding a recurring revenue stream.
3. Adaptability and customization. Offering a service alongside your primary product allows your business to tailor its offering to meet specific client needs, creating a competitive advantage.
4. Building long-term relationships. Moving into a service-based model creates ongoing client interactions, fosters stronger relationships, and can open up some upselling opportunities.

Types of service revenue 

The list of different kinds of service revenue a business can generate is nearly endless. Here are a few of the most common types:

• Professional services such as legal services
• Marketing consulting 
• Subscriptions such as software licenses
• Maintenance and support 
• Managed services such as cloud management 
• Training and education
• Repair and restoration such as computer repairs
• Customization and implementation
• Licensing or usage fees such as granting access to propriety frameworks
• Analytics and reporting
• Creative services such as design or content creation
• Event services
• Testing and certification such as safety inspection

How to calculate service revenue 

Calculating service revenue is a simple and straightforward affair.

First, you need to determine what services you provide. Some businesses may have just one, while others may offer a variety of consulting, maintenance, implementation, and managed services, all of which need to be accounted for.

Next, calculate the revenue you earned for each service. You should be able to extract this data from your financial operations platform.

Then, subtract any discounts, refunds, or allowances provided to customers from the gross revenue. 

Make sure to also account for deferred revenue, which are services paid for in advance but not yet delivered. You’ll want to only include the portion of the payment corresponding to services rendered during the time period for which you are calculating.

Add all of these revenue sources up, less any deductions, and you’ve got your total service revenue for the period.

Here’s what the formula looks like:

How to maximize service revenue 

Looking for ways to create more service revenue for your own organization?

Let’s explore some strategies for increasing revenue, good pricing models to consider adoption, and how to build customer relationships to drive more service income.

Strategies for increasing service revenue 

These are some of the best strategies for creating more service revenue. Bear in mind that not all of them are suitable for every industry, but we’re sure you’ll find something you can apply in your own context:

• Expand your service offerings. For example, an SEO agency could expand into other forms of content creation, such as ebooks and thought leadership content, which would provide more opportunities for revenue.
• Upsell and cross-sell to existing customers. For example, an air conditioner retailer could cross-sell a service and maintenance package.
• Invest in customer retention. For example, a legal firm might hire an account manager to focus on customer relationship management.
• Use tiered models to upsell. For instance, a SaaS provider could structure their pricing so that more advanced features are only available on more expensive plans.
• Bundle services together. For instance, a home cleaning company could sell a bundle that includes a standard clean, carpet cleaning, and mold removal.
• Focus on long-term contracts. For example, a marketing consultant could offer a discount for signing a 12-month retainer.
• Target high-value clients. For example, an IT support company could move upmarket and start targeting enterprise clients, which would provide more revenue opportunities on a per-client basis.
• Leverage referral programs. For instance, a safety inspection company could incentivize referrals by giving return customers a 10% discount on their invoice when they successfully refer a new client.

Effective pricing models for service revenue 

What pricing models work best for service-based companies?

That depends quite a lot on industry expectations, but these are the three most common examples:

1. Flat rate. You charge a fixed rate for a given service.
2. Hourly. You charge customers based on the number of hours the job takes.
3. Subscription. You charge a fixed monthly, quarterly, or annual price for the services you provide.

Building customer relationships to drive service revenue 

Perhaps the biggest key to driving more service revenue is focusing on building long-lasting, trusting customer relationships.

After all, they’re the people paying for your services.

Below are some of the strategies we find most effective for improving customer relationships in pursuit of increasing service revenue:

• Personalized communication. Use customer data to tailor interactions and personalize your recommendations.
• Practice support. Dig into usage data to anticipate client issues and resolve them before they become bigger problems.
• Feedback loops. Set up mechanisms to actively gather and active on client feedback to improve services and demonstrate that you care about their opinions.
• Customer success programs. Recurring revenue businesses can improve retention and lower churn by using customer success programs to help clients achieve their goals with their service.
• Build trust through transparency. Be as open as possible about your pricing, processes, and expectations when working with you. This will help you foster trust and loyalty.
• Celebrating milestones. Recognize achievements like anniversaries and successful project completions to further strengthen the relationship.

Get on top of service revenue with BILL 

Service revenue means a lot of different things to businesses in different industries.

For product-based businesses, service revenue may make up only a small percentage of total earnings. Some companies might not have any service revenue at all.

Other organizations, on the other hand, may rely solely on service revenue to bring in cash flow and keep the business operating as normal.

Whatever situation you’re in and however you’re earning revenue, having visibility over your company’s income and accounts receivable is critical.

That’s why the best financial leaders use BILL’s financial operations platform to:

• Automate accounts receivable 
• Forecast income and expenses
• Accept international payments

FAQ 

Is service revenue an asset?

No, service revenue is not considered an asset.

Instead, it represents the income earned from providing services. For that reason, it's listed on the income statement.

Assets are resources owned by the company (like cash or equipment) which are listed on the balance sheet.

Is service revenue a debit or credit?

In double-entry accounting, service revenue is a credit.

Revenue increases equity, and equity accounts typically have credit balances.

So, when you record service revenue, you’ll credit Service Revenue to recognize the income and Debit either the Cash or Accounts Receivable account, depending on whether or not the revenue was received immediately. 

Where does service revenue go on a balance sheet?

Service revenue doesn’t actually appear on the balance sheet. Rather, it is reported on the income statement (sometimes called the profit and loss statement) under the revenue section.

The impact of service revenue on the balance sheet is indirect. It increases net income, which flows into the retained earnings account in the equity section of the balance sheet.