Dunning is the process that businesses use to communicate with customers about collecting accounts receivable. Accounts receivable are the payments that customers still owe a business for goods or services that have been delivered or used. The dunning process involves sending payment reminders to customers with overdue invoices. This can be done via email, a phone call, letter or other channels – with the goal of reducing customer churn. This goal is important for all businesses, as failed payments cost the global economy more than US$118 billion in 2020 and 80% of businesses that experienced a substantial number of daily failed payments reported losing customers because of it.

In this article, we'll cover what you should know about dunning management systems: what they are, how they work and the best practices you can use to implement and maintain a system that works for your business.

What's in this article?

• What is dunning management?
  
• Why dunning management is so important for businesses
  
• What types of businesses need dunning management?
  
• How do dunning management systems work?
  
• Best practices for dunning management
  
• How to choose a dunning management software solution
  
• How Stripe can help
  

What is dunning management?

Dunning management is the process of communicating with customers to collect accounts receivable, typically for overdue payments. It is a key part of a business's accounts receivable management strategy. Effective dunning management involves the following tactics:

• Communication strategy: Develop a clear communication plan that outlines how and when to contact customers about overdue payments. This strategy often includes a series of escalating messages, starting with polite reminders that become more urgent and direct if the account remains unpaid.

• Automation and software tools: Many businesses use specialised dunning management software to automate the process. This software can send reminders, track customer responses, manage follow-up communications and be integrated with the company's broader financial systems.

• Customisation and personalisation: This entails tailoring communication to different types of customers based on their payment history, the size of the account or the nature of the business relationship. Personalised messages can be more effective in securing payment.

• Compliance and sensitivity: Ensure that all communications comply with relevant local laws and regulations, such as the Fair Debt Collection Practices Act in the United States. Maintain a respectful and professional tone to preserve customer relationships.

• Data analysis and reporting: Monitor the effectiveness of dunning efforts through data analysis and reporting. This involves tracking key metrics, such as the average time to collect payments, response rates to dunning messages and overall impact on cash flow.

• Continuous improvement: Review and adjust strategies based on outcomes and changing customer behaviours on a regular basis. This may include refining the timing of communications, testing different message formats or segmenting customers differently.

Why dunning management is so important for businesses

Dunning management can have a massive impact on a business. Dunning management affects the following:

• Cash flow optimisation: Dunning management has a direct influence on a company's cash flow. By ensuring the timely payment of invoices, it helps to maintain a steady inflow of cash, allowing businesses to cover operational costs and invest in growth opportunities.

• Reduction of bad debt: Effective dunning can significantly lower the risk that accounts receivable will turn into bad debt, which is fundamental to the financial health of a business. Bad debts are costly and can have a negative effect on a company's bottom line.

• Customer relationships: Proper dunning management balances the need for payment collection with the importance of customer relationships. By communicating in a respectful and understanding manner, businesses can encourage prompt payment while preserving good customer relationships.

• Efficiency in accounts receivable: Automating and optimising the dunning process can lead to more efficient accounts receivable operations, which reduces the time and resources spent chasing late payments and allows staff to focus on other projects.

• Data-driven insights: Dunning management provides valuable insights into customer payment behaviours. Analysing dunning data can help businesses to identify trends, assess credit risks and make informed decisions about credit policies and terms.

• Legal compliance and reputation: Adhering to legal standards in debt collection is key. In dunning management, all communications must comply with applicable laws, protecting the company against legal risks and preserving its reputation.

• Scalability: As a business grows, the volume of accounts receivable typically increases. A well-structured dunning process can scale with the business, ensuring that increased volume does not lead to increased uncollected debts.

What types of businesses need dunning management?

Any business that deals with recurring payments should be concerned with dunning management. Businesses and industries where this is especially important include:

• Subscription-based services
  
• Telecommunications and utilities
  
• Healthcare providers
  
• Financial services
  
• Retail and e-commerce with payment plans
  
• Property management and estate agencies
  
• Membership organisations and clubs
  
• Education and training providers
  

How do dunning management systems work?

Different dunning management systems operate in various ways, depending on the business's payment system and unique needs. Here's a general overview of how dunning management systems work:

• Automated reminders
  The system sends reminders automatically about overdue payments via email, SMS or in-app notifications. Businesses can customise reminders with varying levels of urgency and frequency based on payment history, as well as the amount overdue. Typically, initial reminders are gentle and informative, while later ones may be more assertive and include clear deadlines and potential consequences.

• Payment retry attempts
  If the initial attempt fails, the system automatically tries charging the different payment methods stored on file, such as a different credit card, debit card or bank account information. Automation reduces manual intervention and increases the chances of successful payment completion.

• Escalation process
  If automated attempts fail, the account is escalated to a collections agent who will contact the customer directly. Collections agents are trained to negotiate payment arrangements and resolve outstanding issues in a professional and respectful manner.

• Flexible communication channels
  Dunning systems use multiple communication channels to reach customers, which facilitates personalised communication based on the customer's preference and increases the likelihood that a customer will respond.

• Segmentation and targeting
  Dunning systems segment customers based on their payment history, behaviour and demographics. This allows for targeted dunning strategies which are more effective. For example, low-risk customers may receive more automated reminders, while high-value customers may receive interventions that are more personalised.

• Reporting and analytics
  Dunning systems provide comprehensive reports and analytics that track the progress of collection efforts and identify trends. This data helps businesses to measure the effectiveness of their dunning strategies and make data-driven decisions for improvement.

• Integrations
  Dunning systems are often integrated with other types of business software, such as billing systems, accounting software and customer relationship management (CRM) systems. This streamlines data flow and ensures that all relevant information is available for effective dunning management.

• Security and compliance
  Dunning systems must adhere to strict security and compliance regulations to maintain customer data protection. This includes data encryption, access controls and compliance with relevant data privacy laws.

Best practices for dunning management

While every dunning management system should respond to the unique needs of the business using it, there are some universal best practices for dunning management. These include:

• Clear and concise communication: Make sure that your communication surrounding overdue payments is clear, concise and professional. Avoid using technical jargon or overly aggressive language because this can confuse and alienate customers.

• Early intervention: Begin the dunning process as soon as a payment is overdue. Prompt action can prevent small issues from escalating into larger problems.

• Personalisation of messages: Tailor communication to the individual customer. Customers are more likely to read and act upon personalised messages than generic ones.

• Flexible payment options: Offer customers a range of payment options. Consider instalment plans or partial payments for customers who are struggling financially.

• Empathetic tone: Understand that customers may be facing genuine financial difficulties. Showing empathy will help to maintain good customer relationships and can lead to more successful payment negotiations.

• Consistent follow-up: Follow up on overdue payments regularly to show that you are serious about collecting the debt. However, make sure that you are incorporating empathy and avoiding aggressive language towards the customer.

• Use of automation: Leverage automated systems for sending reminders and tracking communications. Automation can save time and reduce errors, but it is important to make sure that it is balanced with a personal touch where necessary.

• Data-driven strategies: Use data and analytics to understand payment patterns and identify customers who are chronically in default. This can help you to tailor your strategy to different customer segments.

• Legal compliance: Every dunning practice must comply with relevant local laws and regulations, including those governing privacy and fair debt collection.

• Continuous improvement: Review and refine your dunning processes regularly, based on customer feedback and the success rate of your collections. This can involve updating communication templates, adjusting the timing of reminders or changing your escalation processes.

• Training and support for staff: Provide training for staff involved in the dunning process so that they understand how to use the system effectively and how to communicate with customers in a respectful and efficient manner.

• Dispute resolution mechanisms: Have clear procedures in place for resolving disputes over invoices. Quick and fair resolution can prevent delays in payment and maintain customer goodwill.

How to choose a dunning management software solution

Choosing the right dunning management software solution can have a major impact on your business's financial health and customer relationships. Here's a quick guide to help you navigate the selection process:

Define your needs and goals

• Identify your key challenges: Are you struggling with high churn rates, late payments or inefficient collections processes?

• Outline your desired outcomes: Do you want to improve cash flow, reduce customer friction or gain deeper insights into customer behaviour?

• Define your budget and resources: How much are you willing to invest in a dunning management solution? Do you have the technical expertise required to implement and manage the system?

Evaluate features and functionality

• Automated reminders and retries: Does the system allow for customisable and automated reminders through a variety of communication channels? Can it retry failed payments automatically with different payment methods?

• Escalation process and communication: Does the system provide a straightforward escalation process for handling outstanding accounts? Does it provide flexible communication options to reach customers effectively?

• Segmentation and targeting: Can the system segment customers based on their behaviour, demographics and payment history? Does it allow you to tailor dunning strategies for different customer segments?

• Reporting and analytics: Does the system provide comprehensive reports and insights into your dunning efforts? Can you track key metrics, such as success rates, trends and communication effectiveness?

• Integrations: Does the system work cohesively with your existing billing, accounting and CRM systems?

• Security and compliance: Does the system prioritise data security through encryption, access controls and compliance with data privacy regulations?

• Researching and comparing solutions: Identify potential dunning management software solutions based on your needs and budget. Carefully examine each solution, reading reviews, comparing features and analysing pricing plans. Shortlist a few options and request demos or free trials to experience the platform first-hand.

• Vendor's expertise and support: Consider the vendor's experience and reputation in the dunning management industry. Assess the quality and availability of its customer support and technical assistance. Choose a vendor that provides ongoing training, resources and updates.

• User-friendliness and scalability: Prioritise a solution with a user-friendly interface that is easy for your team to learn about and use. Confirm that the platform is scalable to accommodate your future growth and evolving needs.

• Negotiating and securing the agreement: Negotiate the pricing plan and contract terms to make sure that they align with your budget and expectations. Clearly define service-level agreements (SLAs) for timely support and performance guarantees.

• Implementing and optimising: Work with the vendor to implement the dunning management solution and train your team to use the platform. Monitor the system's performance and adjust your dunning strategies as needed to optimise results. Evaluate your dunning efforts continuously and make data-driven decisions for further improvement.

How Stripe can help

Several Stripe payment solutions deal with dunning management. Here are a few of the ways in which Stripe enables businesses to be proactive and precise about their dunning management efforts:

Automated reminders and payment retries

• Personalised email reminders: Stripe's system allows businesses to send personalised email reminders for overdue payments automatically, which can be tailored to each customer's specific situation.

• Intelligent payment retries: The system can retry failed payments automatically, using different stored payment methods. This increases the likelihood of successful collection without requiring manual intervention.

• Customisable reminder settings: Businesses have the flexibility to adjust the timing, frequency and tone of payment reminders. This ensures that communication is appropriate for the customer's specific circumstances and payment history.

Easy escalation and flexible communication

• Easy escalation to collections: When automated attempts are unsuccessful, Stripe enables a smooth transition of cases to collection agents for further action.

• Multiple communication channels: Businesses can choose from a variety of communication channels, such as email, SMS or phone calls, depending on what is most effective for reaching their customers.

• Personalised communication templates: Stripe offers a variety of customisable email templates, as well as options for businesses to create their own, which allows for a more personalised touch in communications.

Segmentation and targeting

• Advanced customer segmentation: Stripe provides tools to segment customers based on payment behaviour, demographics and other relevant factors.

• Targeted dunning strategies: Stripe can apply different strategies to various segments. For example, high-touch, personalised interventions can be a better fit for high-value customers, while automated reminders may work better for customers with lower risk profiles.

• Optimised approach for each segment: This tailored strategy enhances effectiveness and minimises any potential negative impacts on customer relations.

Comprehensive reporting and analytics

• Real-time data and insights: Access a detailed reports and analytics Dashboard within Stripe to monitor the effectiveness of dunning efforts in real time.

• Key performance metrics tracking: Measure and analyse a variety of important metrics, such as recovery rates, payment success rates and the effectiveness of different communication channels.

• Data-driven strategy optimisation: Use data insights to refine and optimise dunning strategies on a continuous basis.

Streamlined integrations

• Integration with business systems: Stripe can work with existing billing, accounting and CRM systems, facilitating a seamless flow of data.

• Automated data synchronisation: This synchronisation eliminates the need for manual data entry, saving time and reducing the potential for errors.

• Holistic customer view: A consolidated view of customer data helps businesses to make informed decisions and improve the effectiveness of dunning processes.

Secure and compliant

• Robust data security: Stripe maintains high standards of data security with encryption and access controls.

• Compliance with regulations: Stripe's system adheres to applicable data privacy regulations, helping businesses to remain compliant in their dunning processes.

Global reach and scalability

• Worldwide dunning management: Stripe's global platform supports dunning management across different markets and currencies.

• Scalable solutions: As your business expands, Stripe's system can scale accordingly, thus accommodating growth without any technical constraints.