Understanding Dunning: The Best Defense Against Involuntary Churn


n. The process of handling failed payments and declined credit cards to recover lost revenue.

The word dunning had a very different shade in the pre-SaaS age. It used to be strongly associated with dues collection, and many companies employed persistent, intimidating procedures to demand repayment.

Sometimes called Delinquent User Notification—it was, in its mildest form, a gentle reminder. More often, it was a figurative rap on the knuckles or a dreaded ‘location visit’. Let’s take a quick look at what it has evolved into today and why it matters.

Modern Dunning Has a Lot to Do With Credit Cards and For Good Reason

With the advent of SaaS, dunning processes have turned into something vastly different. While Wikipedia still says dunning is ‘the process of methodically communicating with customers to ensure the collection of accounts receivable’, there’s so much more to it than that.

But first, we need to talk about credit cards.

Credit cards are one of the most popular, global modes of online payment today. For merchants the cost of credit card transactions balances on two factors: processing fees vs. decline rates. While processing fees for credit cards can be higher than other modes of payment because of the additional processing and services it involves, the tradeoff makes sense in cases when decline rates (i.e., losing customers because of declined transactions) are lower.

And unlike bank account transactions that have an unlimited liability exposure*, credit cards offer merchant protection in the form of chargebacks and more. As a result, credit cards account for a considerable percentage of online transactions.

But here’s the kicker:
Almost one in ten credit card transactions fail on a regular basis.

If you have recurring billing setup for a hundred customers, that’s ten transactions failing for common reasons like credit card expiry, blocked cards, network issues and credit card declines due to insufficient funds every billing cycle. Often customers don’t even notice these failures until their credit card statement comes in.

If only there was a way to identify mystifying transaction failures when they happen and automatically alert customers with accurate, timely information.

Enter dunning, stage left.

* Here, this means that in the event of payment anomalies with a customer, there is no time frame set for restitution. For example, a business can be liable for months or even years after a string of transactions were double charged.

What We Really Talk About When We Talk About Dunning

Dunning management is an automated process that lets you do things like:

  • Set up smart retries for failed payments
  • Send you reminders about outstanding dues from declined credit cards
  • Alert customers through professional emails that something’s gone bump in their last transaction
  • Request customer opt in so you can collect updated credit card information directly from credit card providers (a.k.a. account card updater)

But as children are fond of asking multiple times in a row every day, why? What’s the big deal about an automated process that can handle failures? The bottomline is a direct effect on your revenue.

Fighting Involuntary Churn to Recover Revenue

Involuntary churn happens when you lose customers because of payment failures. Even a 1% increase in churn can affect your overall revenue by 10% plus your MRR. And involuntary churn rates can make up a whopping 50% of your actual churn rate.

With dunning, you can recover revenue that you would otherwise lose from trying to charge invalid credit cards.

Several other benefits accrue from using a well-designed dunning system from a customer perspective. These factors aren’t always a part of the dunning process itself, but they do have a demonstrably positive effect on retention and are important to consider. For instance:

Improving Customer Experiences

Without graceful dunning procedures and dunning emails, your business is writing its own script for ‘How to Lose a Customer for No Reason’ because:

  • Identifying payment failures and solutions is now the customer’s problem, which hits retention rates hard
  • Without automated retries, the payment verification process may take days
  • Communication becomes strained because the customer (understandably) does not want to deal with this on a Wednesday afternoon at work
  • Suspicious credit card activity can alarm people and put your trustworthiness in question

An effective Dunning system introduces a vital layer of security, trust and professional friendliness into monetary conversations with the customer.

A big chunk of payment failures are unavoidable, unintentional and involuntary. Good business mettle doesn’t demand that you prevent this, simply that you handle it well.

Pro Tip

What if the people using your product aren’t the ones paying for it?

When you send corporate users your billing emails, they’re generally forwarded to departments in charge of payments and with access to billing information. But the user still holds all the user information needed for logging into the system. The resulting coordination tangle can be a huge time suck. Dunning systems that employ a ‘one-click update’ remove the need for unnecessary coordination and let executive sponsors deal with payment failures easily.

The Billing Intelligencer

A shortlist of essential reading material encompassing top insider insights & pro perspectives on dunning management:

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