Failed payments on subscription services comprises 20%–40% of total churn for subscription businesses. Dunning, the process by which companies attempt to mitigate the built-in weaknesses of their subscription model, can support a company’s financial stability and bolster its customer relations. With the right strategies, businesses can alleviate the strain of overdue payments while fostering a respectful relationship with their customers.

Below, we’ll cover the essentials of dunning, its significance, and best practices for implementing an effective dunning strategy.

What’s in this article?

• What is dunning?
  
• Why dunning matters for businesses
  
• What’s involved in dunning management?
  
• How the dunning process works
  
• Dunning best practices
  
• Stripe’s approach to dunning management
  
• How Stripe Payments can help
  

What is dunning?

Dunning is the process of communicating with customers or clients to collect payments that are due or past due. This is critical for maintaining cash flow, controlling unintentional customer churn, and managing customer relationships. Dunning is also critical for minimizing “bad debt,” which in this context refers to outstanding receivables or money owed to a company that is deemed uncollectible after repeated attempts to secure payment.

Why dunning matters for businesses

Dunning is an important consideration for businesses for many reasons, including:

• Improving cash flow
  By ensuring that payments are collected in a timely manner, dunning helps maintain a steady cash flow, which is critical for a business’s daily operations and growth.

• Reducing bad debt
  Actively pursuing overdue accounts can prevent them from turning into bad debt, which can be costly for businesses to write off.

• Maintaining customer relationships
  Through structured and respectful communication, businesses can use dunning to help preserve customer relationships. By showing their willingness to work with the customer, businesses can turn a potentially negative experience into an opportunity for customer retention.

• Optimizing internal resources
  When employed efficiently, and especially when automated, dunning processes can free up internal resources that businesses might otherwise spend on tedious, ineffective follow-up with customers.

• Mitigating risk
  Regular dunning practices help businesses identify and manage risk by spotting trends in late payments or nonpayment, which can indicate larger issues with particular customer segments or markets.

• Supporting financial forecasting
  When dunning is managed effectively, businesses have a clearer picture of their accounts receivable, which is important for accurate financial planning and forecasting.

• Ensuring compliance
  Depending on where a business is located, there may be legal requirements around how debts can be pursued. Establishing a structured dunning process helps ensure that businesses stay compliant with these regulations.

• Enhancing company reputation
  A professional and structured dunning process can improve a company’s reputation by creating positive customer experiences at every touch point.

What’s involved in dunning management?

Dunning management is a process that helps businesses recover payments from customers in a way that respects the integrity of the customer relationship. Here’s what dunning management entails:

• Setting clear payment terms and conditions with automation
  Before any transaction takes place, it’s crucial to establish clear payment terms and conditions and communicate these with customers. This includes payment due dates, late fees, grace periods, and accepted payment methods. Transparency will help set the right expectations and prevent misunderstandings. This includes integrating terms into user onboarding flows, using APIs to automate updates to terms and conditions, and ensuring that customers have easy access to these terms through their accounts.

• Integrating accounts receivable management into your tech stack
  For tech-powered companies, integrating accounts receivable management into the broader technology stack is an essential part of dunning management. This means not only using accounting software, but ensuring that your subscription management platform, customer relationship management (CRM) system, and analytics tools are synced to provide real-time data on customer accounts.

• Using personalized and data-driven communication for reminders
  When sending (gentle) reminders to customers, employ personalized communication that is informed by customer data. For example, segmenting customers based on their billing history or interaction with your service can help tailor the messaging. Use automated email campaigns, in-app notifications and formal dunning notices where relevant.

• Escalating communication through multiple digital channels
  Aside from traditional communication methods such as email and phone calls, consider using in-app notifications, SMS, and even social media communication if appropriate. The goal should be to reach the customer through the channels they engage with most.

• Centralizing communication documentation in CRM
  Log all communication centrally, preferably within a CRM system that is integrated with your subscription management platform. This ensures easy access to communication history for customer support and sales teams.

• Implementing AI-driven insights for telephone follow-ups
  Use AI-driven insights to find the best time to call a customer and provide the representative with real-time information on the customer’s history, preferences, and potential reasons for nonpayment.

• Dynamic and customer-centric flexible payment options
  Tech companies should consider implementing algorithms that offer dynamic payment options based on a customer’s history and value. For high-value customers, offering more generous terms might be appropriate. Additionally, providing self-service options and a choice of payment plans can empower customers and improve relationships.

• Leveraging specialized dunning software with machine learning
  Dunning software has evolved to include machine learning algorithms that can predict customer payment behavior and optimize communication strategies. Integrating such software can significantly improve the efficacy of the dunning process.

• Evaluating credit risk with predictive analytics
  Use predictive analytics to assess the future payment behavior of customers. This can inform decisions about whether to modify credit terms or require alternative payment assurances.

• Data-driven continuous improvement
  Use A/B testing, customer feedback, and data analytics to continuously improve your dunning processes. Ensure that you are measuring the right KPIs and that this data feeds into a culture of ongoing optimization.

• Training staff with a focus on customer success
  Training should focus not only on the dunning process but also on broader customer success principles. Empower your team with data and tools, and ensure they understand the role of dunning within the larger context of customer lifecycle and retention.

How the dunning process works

For modern businesses, and especially for SaaS or subscription-based businesses, dunning is a vital part of revenue management that focuses on collecting unpaid invoices or resolving failed credit card transactions.

However, dunning is not simple debt collection. Here’s how the process typically works:

1. Payment failure: The dunning process begins the moment that a payment is missed. This can be a customer account declining a SaaS transaction, or a contracting business failing to pay an invoice by its due date.

2. Immediate outreach: Many businesses operate with a “soft” approach to dunning. This typically involves sending a message to customers alerting them of the decline, and giving them a grace period to fix the payment information.

3. Smart retries: Modern payment gateways typically perform smart retries. Rather than just emailing the customer, the system attempts to charge the card again at strategic times when the transaction is most likely to succeed.

4. Outreach escalation: If the initial reminders go unanswered, the tone and pace of communication might become firmer. Messages will outline the consequences of continued nonpayment, including late fees, service interruptions, or even closed accounts.

5. Service suspension: If a payment remains unresolved after a set period, the business can move to account suspension. The customer may be locked out of the software or have their service paused until the balance is cleared.

6. Final notice: If all dunning efforts fail, the account is officially considered churned. At this stage, the business could choose to write off the debt or hand over the account to a collections agency.

Dunning best practices

The best dunning management strategy is one that reflects a nuanced understanding of the specific customer base it serves. While this will look different for every business, there are a handful of best practices that will work well for most businesses:

• Clear communication from the start: Clearly communicate payment terms and conditions to customers from Day 1. This sets expectations and helps avoid misunderstandings.

• Automation with a human touch: Using dunning software to automate tasks such as sending reminders and tracking accounts shouldn’t mean that communications seem robotic. Craft all dunning comms with a human touch, whether or not they will be deployed automatically.

• Personalization of reminders: Customize your dunning messages to address the customer by name and provide specific details about their account. Personalized messages are often more effective than generic ones.

• Timely and gradual escalation: Begin with gentle reminders and gradually escalate the tone and frequency of communication as the invoice becomes more overdue. However, ensure that all communication reflects a carefully crafted brand voice that preserves a positive feeling with your customers.

• Multiple channels of communication: Use multiple communication channels such as email, phone calls, and SMS to reach out to customers. This increases the chances that customers will see your message.

• Flexibility in payment options: Offer different payment options (credit cards, wallets, etc.) and, if necessary, consider negotiating payment plans with customers who may be facing financial difficulties.

• Keep detailed records: Maintain a detailed record of all communication with customers during the dunning process. This is important for internal tracking and can be vital in case of disputes.

• Know the legal framework: Make sure you are well-versed in the legal aspects of debt collection for your jurisdiction. This ensures that your dunning process is compliant with laws and regulations.

• Measure and analyze performance: Regularly measure the performance of your dunning process. Analyze the data to identify trends and areas for improvement.

• Feedback from customers: Actively seek feedback from customers regarding the dunning process. Understanding your customers’ perspective can provide you with valuable insights for improvement.

• Contingency planning: Have a clear plan in place for when to escalate the case to a collection agency or take legal action, and ensure that these steps are communicated clearly in the dunning messages.

These best practices will enable you and your team to optimize your dunning process, improve the collection of payments, and maintain good relationships with your customers.

Stripe’s approach to dunning management

Stripe’s approach to recurring billing, subscription management, and dunning management reflects a blend of automation, customization, and customer empowerment. Through automated emails, smart retries, a customer portal, and integration with third-party services, Stripe provides businesses with an arsenal of tools to handle overdue payments. Here’s how it works:

• Automated emails
  Stripe allows businesses to automate the process of sending emails to customers when a payment fails. These emails can be customized and can include a link for the customer to update their payment information.

• Smart retries
  Stripe uses an intelligent algorithm to retry failed payments at times when the payment is more likely to succeed. This reduces the need for manual intervention and helps you recover more revenue.

• Customer portal
  Stripe provides a customer portal where customers can manage their own subscription and billing information as well as update payment methods. Expired payment methods is one common cause of failed payments.

• Customizable billing settings
  Businesses can customize how Stripe handles failed payments. This includes setting the number of times Stripe should attempt to retry a payment, and the amount of time that must pass before a business considers a payment uncollectible and closes the invoice.

• Integration with third-party dunning services
  Businesses that want more advanced dunning features have the option to integrate Stripe with third-party dunning management services. These services often provide additional features such as more customizable dunning emails, SMS reminders, and detailed analytics.

• Hosted invoice page
  When payments fail due to expired credit cards or other issues, Stripe allows customers to pay through a secure, Stripe-hosted invoice page where they can update payment details and complete the payment.

• Subscription update events
  Businesses can track subscription updates and changes, including cancellations due to nonpayment, using Stripe’s subscription events. Once analyzed, this data can be used to further refine dunning strategies.

By facilitating a seamless and respectful communication channel with customers, alongside real-time updates and tracking, Stripe empowers businesses to optimize their revenue collection while nurturing positive customer relationships. As the payments landscape continues to evolve, staying abreast of the latest features and best practices in dunning management is essential for businesses striving for financial sustainability and customer satisfaction. Learn more about how Stripe works with subscription-based businesses.

How Stripe Payments can help

Stripe Payments provides a unified, global payments solution that helps any business—from scaling startups to global enterprises—accept payments online, in person, and around the world.

Stripe Payments can help you:

• Optimize your checkout experience: Create a frictionless customer experience and save thousands of engineering hours with prebuilt payment UIs, access to 125+ payment methods, and Link, a wallet built by Stripe.
  
• Expand to new markets faster: Reach customers worldwide and reduce the complexity and cost of multicurrency management with cross-border payment options, available in 195 countries across 135+ currencies.
  
• Unify payments in person and online: Build a unified commerce experience across online and in-person channels to personalize interactions, reward loyalty, and grow revenue.
  
• Improve payments performance: Increase revenue with a range of customizable, easy-to-configure payment tools, including no-code fraud protection and advanced capabilities to improve authorization rates.
  
• Move faster with a flexible, reliable platform for growth: Build on a platform designed to scale with you, with 99.999% historical uptime and industry-leading reliability.
  

Learn more about how Stripe Payments can power your online and in-person payments, or get started today.