Dunning is the process businesses use to communicate with customers about collecting accounts receivable. Accounts receivable are the payments customers still owe a business for goods or services that have been delivered or used. The dunning process involves sending customers with overdue invoices payment reminders via emails, phone calls, letters, or through other channels—with the goal of reducing customer churn. This goal is important for all businesses: failed payments cost the global economy more than $118 billion in 2020, and 80% of businesses that experienced a substantial number of daily failed payments reported losing customers over the matter.

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 specialized dunning management software to automate the process. This software can send reminders, track customer responses, manage follow-up communications, and integrate with the company’s broader financial systems.

• Customization and personalization: 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. Personalized messages can be more effective in securing payment.

• Compliance and sensitivity: Ensure that all communications are compliant 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: Regularly review and adjust strategies based on outcomes and changing customer behaviors. This might 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 optimization: Dunning management directly influences a company’s cash flow. By ensuring timely payment of invoices, it helps 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 significant for the financial health of a business. Bad debts are costly and can negatively affect 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 optimizing 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 behaviors. Analyzing dunning data can help businesses 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 be compliant with applicable laws, protecting the company from 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
  
• Health care providers
  
• Financial services
  
• Retail and ecommerce with payment plans
  
• Property management and real estate
  
• Membership organizations 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 automatically sends reminders about overdue payments via email, SMS, or in-app notifications. Businesses can customize reminders with varying levels of urgency and frequency based on payment history and 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 retries to charge 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 personalized 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, behavior, and demographics. This allows for targeted dunning strategies that are more effective. For example, low-risk customers might receive more automated reminders, while high-value customers might receive interventions that are more personalized.

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

• Integrations
  Dunning systems often integrate with other 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 your communication around 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.

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

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

• Empathetic tone: Understand that customers might be facing genuine financial difficulties. Showing empathy will help 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 you are incorporating empathy and avoiding aggressive language toward the customer.

• Use of automation: Leverage automated systems for sending reminders and tracking communications. Automation can save time and reduce errors, but make sure to balance it 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 tailor your strategy to different customer segments.

• Legal compliance: Every dunning practice must be in compliance 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 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 behavior?

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

Evaluate features and functionality

• Automated reminders and retries: Does the system allow customizable and automated reminders through a variety of communication channels? Can it automatically retry failed payments 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 behavior, 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 prioritize 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 analyzing pricing plans. Shortlist a few options and request demos or free trials to experience the platform firsthand.

• 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: Prioritize a solution with a user-friendly interface that your team can learn and use easily. 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 they align with your budget and expectations. Clearly define service level agreements (SLAs) for timely support and performance guarantees.

• Implementing and optimizing: 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 optimize 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 Stripe enables businesses to be proactive and precise about their dunning management efforts:

Automated reminders and payment retries

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

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

• Customizable 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 collections 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.

• Personalized communication templates: Stripe offers a variety of customizable email templates, as well as options for businesses to create their own, which allows for a more personalized touch in communication.

Segmentation and targeting

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

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

• Optimized approach for each segment: This tailored strategy enhances effectiveness and minimizes potential negative impact 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 analyze important metrics such as recovery rates, payment success rates, and the effectiveness of different communication channels.

• Data-driven strategy optimization: Use data insights to refine and optimize 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 synchronization: This synchronization 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 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 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—accommodating growth without technical constraints.