Introduction
If you are a business handling recurring payments, you might have had to deal with payment failures or glitches at some point. These inconveniences arise from insufficient funds in the customer’s account, expired cards, or even technical issues.
Dunning management works as a remedy to this problem. When a subscription payment fails, this system automatically notifies the customer and suggests helpful corrective measures.
In this article, we’ll look at what dunning management is, how it works, and some best practices to help your business defeat involuntary churns.
What is dunning management?
Dunning management is the automated process of handling failed or overdue payments that occur in recurring billing models, particularly for businesses in the SaaS and fintech industries. Here, the customers are first informed about the failed transaction via emails, text messages, or notifications on the application. After this, the recovery process is initiated to minimize the involuntary churn.
Dunning management is like an antidote to the passive nature of invoices as it combines smart retry logic with customer-friendly emails across a variety of platforms.
Why is dunning management important?
Dunning management is considered to be an important countermeasure to issues like failed payments that wipe out a significant percentage of subscription revenue through involuntary churn.
Customers rarely cancel orders on purpose when they encounter an attempt at failed payment. Dunning management helps to fix that with timely retries and friendly emails. For businesses, dunning management majorly affects cash flow optimization, customer relationships, data-driven insights and legal compliance with notifications.
What are the common reasons for payment failures?
Most payment failures originate from expired cards, insufficient funds, or bank-side authentication issues rather than customer intent to cancel. Such issues can trigger involuntary churn if dunning management doesn’t step in with preventive retries and reminders. Here are some of the most common reasons for payment failures:
- Insufficient funds: This occurs when the bank account linked to your card or subscription faces a temporary cash shortfall, causing the payment to fail.
- Expired cards: If your card expires and isn’t updated in time, it can block automatic renewals.
- Authentication errors: At times, 3D Secure or SCA prompts may time out or confuse users, preventing payments.
- Glitches in bank operations or the network: Scenarios like the issuer accidentally clicking on the back button, gateway timeouts, or fraud flags can hinder customers’ payment process.
- Outdated details: This includes scenarios where there is an address mismatch or unlinked new cards used for processing the subscription payment.
How does the dunning process work?
A dunning process gets activated right after a subscription payment fails. It automatically retries the payment, notifies the customer, and follows clear escalatory steps to recover the amount. Here is how your dunning cycle unfolds, step by step:
- Day 0: Payment fails: This is when the subscription fails to renew, and the payment gets declined due to multiple errors.
- Day 1 to 3: Smart retries are performed: The dunning management software now schedules automatic reattempts in accordance with the error codes and the optimal timing to process the payments.
- Day 1 to 7: First reminders are set out: Friendly emails or SMS alerts are sent to customers along with a one-click link to revisit and update their payment details in this stage.
- Days 7 to 14: Escalation emails: The tone of the notices gets firmer to create a sense of urgency. The messages may also include suggestive payment plans or alternative methods that your customer can explore if required.
- Day 14 onwards: Final action: At this point, the business shifts its focus from trying to retain the customer to protecting its own revenue by minimizing any further losses by limiting services after a final unpaid window.
Dunning management vs traditional collections
Traditional collections implement a tedious collection chase for long-overdue debt through manual follow-ups or by partnering with third-party agencies. On the other hand, dunning management is a smart approach to recover early failed payments by leveraging automation and customer-friendly reminders. Here’s how they differ from each other:
| Aspect | Dunning management | Traditional collections |
|---|---|---|
| Timing | Acts immediately after payment failure. | Takes action after weeks or months of non-payment. |
| Approach | Automated retries, emails, and self-service via one-click links. | Manual calls and letters escalating into legal action. |
| Goal | To recover revenue and reduce involuntary churn. | Collect bad debt and minimize write-offs. |
| Tools | Built-in dunning management tools in platforms like Stripe. | Agencies, legal teams, and offline processes. |
| Customer impact | Keeps relationships intact. | Often damages trust and brand name. |
What are the best practices for effective dunning management?
Effective dunning management is the perfect combination of automation and empathy that recovers failed payments while also retaining the customer. Follow these best practices to tailor your dunning management system without using aggressive tones that can seem repulsive to the users.
- Once a payment failure is detected, take immediate action: The first 24 hours after the payment decline are vital to start retries and send out the first emails.
- Don’t forget to personalize the outreach: Segment your customers, consider your high-value customers for gentler handling as compared to the trial users.
- Avoid over-complicating the fixes, keep it simple: Another good practice is to include a one-click payment update link in every dunning email you send.
- Be mindful when timing the retries: Space your retries on the basis of error types. You should avoid peak billing days for low-fund cases.
- Test the process on the basis of key metrics and improve: You should also perform a timely analysis of your open rates and recoveries to refine the email copy and the dunning cycle length.
What are dunning emails?
Dunning emails are friendly automated messages sent by your system to the customer right after a payment fails. These are subtle nudges that direct customers to update their card or retry the payment. These emails mention the pertaining issue clearly and also come with a one-click link to fix it. This effort keeps your subscriptions alive without support tickets piling up.
Dunning emails work best when the copy is empathetic, understands the customer’s psyche, and is clear from the very start. The urgency slowly builds once the cycle progresses.
How to automate dunning management?
Platforms that run on subscriptions can highly benefit from automating dunning management. Once you set it up, it retries payments, sends emails, and even escalates based on the rules you define for multiple payment failure scenarios. Here is how you can effectively automate the process:
- Opt for integrated tools: To make the process easy, get software or tools that offer built-in features for handling retries and notifications for dunning management.
- Configure smart rules: Next, you need to schedule retries based on the error codes defined for the scenarios.
- Build email sequences: Now you can automate and personalize polite dunning emails with payment links.
- Add multi-channel alerts: A smart practice is to layer SMS or in-app notifications along with emails for higher chances of recovery.
- Monitor and optimize the process via dashboards: Use the interface offered by the integrated tools to analyze the progress and make data-driven decisions. Keep adjusting the dunning management process for better performance.
What are the key metrics to track?
The right metrics can help you understand how well your system recovers cases of failed payments and involuntary churn. This involves key metrics like days to recovery, involuntary churn rate, recovery rate, etc.
- Recovery rate: This is the percentage of failed payments that are collected during the dunning cycle. A healthy exercise is to maintain the recovery rate above 60%.
- Involuntary churn rate: This covers the share of cancellations from payment failures, avoiding the ones that are cancelled by user choice.
- Days to recover: This metric measures the average time it takes from failure to a successful charge.
- Retry success rate: This metric measures how many payment retries succeed in a day or over a full dunning cycle.
- Email performance: This involves sub-metrics like open, click, and conversion rates on the dunning emails.
Final thoughts
Dunning management is an effective approach to transform failed payments into recoverable cash flow through automation and empathy-driven communication with your customers. As a business, using a dunning management software is an asset as it helps you minimize involuntary churn and also keeps MRR steady even when cards expire or the banks glitch.
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Frequently asked questions
Dunning management can be defined as the automated or systematic process used by businesses to recover overdue payments and handle failed transactions.
Subscription payments can fail due to multiple reasons, such as expired cards, insufficient funds, or technical problems like payment gateway errors.
When your customer loses their access to a subscription service because of payment failure, like an expired credit card, maxed-out limit, or bank error, it is called an involuntary churn.
A dunning cycle lasts up to 30 to 90 days and is structured with escalating notices like emails, calls, and formal letters before moving to collections or legal action.
Dunning emails are transactional reminders that are sent to customers about overdue payments or failed transactions.
Yes. Dunning management can be automated with systems that can handle failed payments through automated reminders, retries, and communication channels like emails and SMS.
