How to Reduce Churn with Payments: Dunning Management Revisited

~ 6 min read | October 6

involuntary churn

Update: We’ve created an infographic on how dunning can prevent involuntary churn of SaaS businesses by studying 5.36 million transactions. Click here to know more.


The Pesky Challenge That All Businesses Face.

It creeps up like a drunk uncle at the family holiday party, ready to ruin a perfectly pleasant evening. And like dear old uncle, it can be just as unpredictable as it is damaging to the occasion.

Churn happens for a variety of reasons including improper onboarding, poor customer service, and poor marketing. These reasons are what you’d categorize as voluntary churn – when customers actively leave your product or service. It’s what we’d call preventable.

But today we’re going to zero in on one of the most annoying – yet surprisingly common – causes for customer churn: unintentional cancellation.

To start, unintentional cancellations sound like the makings of involuntary churn (not preventable). Involuntary churn happens when circumstances outside your control affect a customer’s decision to stay.

However, unintentional cancellations still count as voluntary. They’re within your company’s control, but with a subtle caveat: the customer is oblivious to the fact that they have churned.

And the most common instigator of an unintentional cancellation?

Payment processing errors.

Errors can occur when cards have gone over their limit or have been cancelled. But the single largest contributing factor to payment processing errors is – wait for it – having an expired credit card on file. I know right? Surprising!

But in reality, credit cards expire more often than you think. In 2014, fraud detection agency 41st Parameter reported that retailers lose $40 billion each year to unnecessary credit-card declines.

Credit card declines have a significant impact on SaaS churn. But considering this issue’s relative ease of prevention, we can consider it as one of the lowest of hanging fruits in a churn prevention strategy.

Dunning Management Shouldn’t Be Reactive

Far too often companies make the mistake of taking a defensive approach to solve this problem. Imagine this process flow:

  • Credit card is declined (expired or otherwise).
  • Company manually attempts to contact customer, phone/email tag may ensue.
  • Support gets customer to key in new info after the credit card has expired.

It’s an inefficient system with plenty of friction points. And here’s a few reasons why it doesn’t work.

  1. The task of inputting the new credit card credentials might be put on backburner. Your customers are busy enough as it is with running their companies.
  2. Expired credit cards mean that customers may have been considered “churned” for more than a couple months. They might need to re-engage, or even pay for past months and bring accounts up to date.

Allowing a credit card to expire first means your customer is more likely to re-evaluate their choice and investigate alternatives.

From an engagement standpoint, it’s a big difference than if they had just updated their information prior to their credit card expiring. Psychologically, it greatly diminishes the urgency of the task.

Naturally, you feel more pressure to do something if it will prevent a negative outcome than you do once the negative outcome has already occurred.

For SaaS, an expired credit card means shutting off their service. It’s a necessary policy but often a negative experience for your customers.

It is significantly easier to retain a customer who’s still on board than it is to resell your product’s usefulness to someone who is technically, a former paying customer.

So why is this still a problem for so many companies? Perhaps, they are unaware of the other ways they could go about things.

Or maybe it’s complacency – they figure doing things this way is less bothersome than finding another method.

A Better Approach to Dunning Management

The better approach is the proactive one.

It starts by setting up a process to alert and notify everyone involved (you, your customer) when an account’s payment option is set to expire.

Collecting this data should be straightforward since you’ll be getting it at the point of payment. SaaS expert, Lincoln Murphy advises contacting your customer 60 days prior to expiry.

Apart from the traditional phone call/e-mail approach, he also recommends adding notices to each marketing and/or transactional e-mail you send out from the 60-day point and onward.

A simple “the credit card we have on file for you is set to expire on (date)” will do.

“That’s all well and good, but how do you go about setting up an automated alert process for that?” you may be asking.

The quickest way is to use a payment processor that gives you this information and allows you to set up exactly these types of notifications.

Braintree is a safe, secure, ChargeBee-compatible option. Other options are to use events-based analytics + push notification platforms like Woopra, Mixpanel, and Intercom to automate messages and alerts when cards are about to expire.

If your company already has a payment processing system in place, try checking out if there’s a corresponding churn prevention software that can be tacked on to track this metric.

As you can see, the bright side to this common problem is that you have a lot of solutions at your disposal. The point being: don’t lose your customers to something this easy to correct.

Alternative Strategy: Skip the Credit Card Altogether

Give your customers options and have multiple payment choices available including credit card, Pay with PayPal or invoice based billing (for quarterly / annual payments in advance).

Additional Benefits of Proactive Dunning Management

Being proactive vs reactive is the difference between good and great. Reactive processes can get you caught up in a never-ending scramble to put out fires.

Instead, focus on fire safety.

Be proactive, talk to your customers, and let them know what’s happening ahead of time. Your company will benefit by being on the front of their mind (marketing and re-engagement), you’ll be considered a forward thinking company (customer sentiment), and giving yourself a better lead time will open you up to garner feedback in case your customers were planning on letting their cards expire and leave.

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Lesley Park

Lesley is Framed Data's helper elf. She's a self-professed geek and an engineer by day. When she's not crunching numbers, Lesley is an avid concertgoer and foodie with a serious case of wanderlust.

Tim Wu

Tim is the Marketing and Growth Director at Framed Data. Outside the office you'll find him taking photos, in a squat rack or on his way to the next travel destination.