Master dunning management to reduce recurring revenue leakage (FAQs answered)

Published on: April 19, 2022

Like any other form of payment, recurring billing has its own unique challenges. Subscription services lose roughly 2% of customers each month due to expired credit cards that aren’t updated. When you start to factor in failed payments caused by spending limits, insufficient funds, payment gateway glitches, or cancelled credit cards the involuntary churn rate accounts for a sizable revenue leak.

Dunning is the process of communicating with customers to recoup such losses. Despite a negative public perception, modern dunning management can contribute to a positive customer experience and significantly increase your monthly recurring revenue (MRR).

Whether you’re implementing a SaaS billing model for the first time or simply trying to ramp up your monthly or annual recurring payments, effective dunning management will be central to your success. This blog answers some of the most frequently asked questions about dunning, so you can master the process to mitigate revenue leakage and involuntary churn.

Skip ahead to a specific section on dunning management by clicking on the topic below. 

What is dunning?

It’s normal for businesses to encounter a failed payment at some point. Whether it’s due to insufficient funds, a misconfigured payment gateway, or an expired credit card, you will need a way to recoup your monthly recurring revenue (MRR). Dunning is the practice of communicating with customers to recover lost revenue from failed payments and reduce involuntary subscriber churn.

Although the term “dunning” is still used in accounting, people who work in other departments might explain the same concept using terms like “accounts receivable” or “collections process” instead. For instance, dunning management can be found under the credit and collections feature and optimized with collections process automation for Microsoft Dynamics 365 solutions.

 

What is a dunning letter?

A dunning letter, or collection letter, is the collection notice sent to customers informing them that their last payment has not gone through. Modern subscription businesses rarely contact their subscribers via paper letters, opting instead for digital communication methods like email, SMS, or app notifications.

There are many templates and programs online that can help you generate a dunning letter. Here’s a helpful guide to walk you through creating a collection letter through the accounts receivable feature in Microsoft Dynamics 365.

What is the difference between voluntary and involuntary churn?

Voluntary or active churn results from customers making the conscious decision to unsubscribe from your service. Typically, the subscription is cancelled because the service no longer fulfils the customer’s wants or needs.

Involuntary or passive churn occurs when a customer’s subscription is cancelled because something is stopping them from paying. This type of churn accounts for a sizable portion of preventable revenue leakage because the customers often don’t want to unsubscribe—they just aren’t presented with a clear option to fix their payment issue.

What is involuntary churn?

Why do SaaS companies need dunning management?

Subscriber churn is an unavoidable obstacle that every SaaS business must handle. Fortunately, effective dunning protocols can recover on average 9% of your MRR. Dunning management empowers you to proactively reach out to customers to update their payment method, prevent service disruptions, and facilitate an overall positive customer experience—reducing revenue lost through involuntary churn.

What is pre-dunning?

Pre-dunning is the practice of sending reminders to customers that an upcoming payment may fail unless they update their information. There has been an open debate about whether customers perceive this tactic as helpful or annoying.

Pre-dunning used to be a best practice, but in recent years it has started to fall by the wayside as subscription businesses have become more popular and there are more options for preventing failed payments behind the scenes. For example, some SaaS companies may communicate directly with issuing banks to automatically update customers’ credit card information.

When is pre-dunning appropriate?

When is pre-dunning appropriate?

Nevertheless, there are still a few scenarios where pre-dunning may be appropriate for your business. It has shown to be effective in the following three circumstances:

1. The customer’s credit card is going to expire

According to the Subscription Commerce Conversion Index, the average subscriber holds five different retail subscriptions. It’s safe to say that your customers may struggle to keep track of all their subscriptions and need a reminder to update their payment details. A best practice is to remind them 30 days before and, if they haven’t taken any subsequent action, 7 days before their card expires.

2. The billing cycle is bi-annual, annual, or longer

Oftentimes, the longer the duration between payments, the higher the risk of it failing. Businesses that offer billing cycles with bi-annual, annual, or longer options may benefit from pre-dunning to ensure that the customer’s payment method and details are still accurate.

3. The first payment after a free trial ends

Whether or not your business collects billing information during sign-up, it’s a good idea to establish transparency early in your relationship with the customer. A quick reminder that states when the free trial will end, the amount you will start charging, and the due date for the first payment will help avoid angry customers that simply forgot to cancel their subscription on time.

What is automated dunning management?

Manually addressing every customer’s declined or failed payments is an impossible task that would waste valuable time and resources. The only worse solution would be to not contact your customers at all. Automated dunning management (a.k.a. collections process automation) streamlines the process by performing actions like:

  • Send friendly reminders about outstanding dues from declined credit cards
  • Complete smart retries for declined and failed payments
  • Alert subscribers with specific error messages when their last transaction did not go through
  • Provide customers with step-by-step instructions for resolving their failed payment
  • Request customer consent to collect their credit card information for automatic card updates
  • Record all declined and failed payments for customer retention strategy insights

 

How does automated dunning management reduce involuntary churn?

In addition to saving your accounting team hours combing through accounts and drafting dunning letters, automated dunning management counteracts involuntary churn by contributing to a positive customer experience. Below covers the top three features that benefit subscribers.

How does automated dunning management reduce involuntary churn?

1. Automatic retries for failed payments

Subscription services have gained a reputation offering peak convenience, but when a payment fails, customers may become frustrated and churn for a few reasons:

  • They don’t know they can retry their payment method.
  • They assume retrying their payment method will incur costs, even though payment gateway providers typically only collect fees as a percentage of successful payments.
  • They think it will be a hassle to retry their payment method.
  • The retry schedule doesn’t fit their specific needs.

Automatic retries with a customizable schedule can address all these concerns and minimize unpleasantness by reducing the frequency and degree to which the subscriber needs to get involved. Fewer barriers to paying for services means more happy customers.

2. Professional and friendly customer communication

Manually drafting dunning letters for every customer with a failed payment is not only a time-consuming process, but also is prone to error. Sending a collection notification riddled with typos or mixing up which past due invoice email to send to which subscriber can make your business look unprofessional. Automated dunning management organizes customer communications to facilitate enhance customer relations. Some solutions can even make the reminders more friendly by adding personalized touches like the customer’s or business’ name.

3. Records of state of accounts

A statement of accounts and accounts receivable aging information is indispensable for assessing the financial health of your customers. Without this data, it’s much harder to strategize feasible methods for decreasing outstanding payments and mitigating bad debt. Automated dunning management generates accurate customer aging reports that provide insights like the number of failed payments, renewed subscriptions, upgrades, and suspended accounts.

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