What Is Dunning, and How Do You Use It to Increase SaaS Customer Retention?

| Accounting

by Chargify

What is dunning, and why is it important for SaaS customer retention? In a recurring subscription-based business model, failed payments and transactions create the risk of customer churn and lost revenue. Something as simple as an expired credit card can disrupt the payment process and cost you a customer.

SaaS dunning is a strategy that enables you to communicate with customers proactively to prevent recurring billing disruptions. Here, we’ll cover the basics you need to know about the dunning process in a SaaS model, including dunning management best practices like how to use payment recovery software to automate your credit card dunning process.

What is Dunning?

Dunning is the practice of systematically communicating with customers to collect payments on accounts receivable debts. The term comes from the verb “dun,” which means to persistently demand payments.

Historically, dunning involves making a series of escalating attempts to collect payments. These usually start with friendly payment reminders and gradually progress to sending a more assertive demand for payment (using a format known as a dunning letter or dunning notice), threatening legal action, and, when necessary, filing a formal complaint in court to enforce collection action. In a SaaS context, dunning usually takes a less legalistic, more constructive approach, using reminders to encourage customers to catch up on late payments before their subscription lapses.

How Does Dunning Apply to SaaS Businesses?

For SaaS businesses, dunning serves as a strategy to prevent customer churn. Churn is a metric measuring the ratio of customers lost over a given period to the number of customers at the start of the period. It is the flip side of customer retention, which tells you what percentage of customers are renewing their subscriptions over a given period. The higher your retention, the lower your churn, and the more revenue you make. On the other hand, high churn rates lower your retention and decrease your revenue. This makes minimizing churn a priority for SaaS companies seeking to maximize profitability.

Dunning provides a simple yet effective way to reduce churn. A small (but significant) percentage of churn comes from customers who wanted to renew their subscriptions and continue making recurring payments but were unable to do so because of billing issues. This is a phenomenon known as involuntary churn. Reaching out to these customers instead of simply canceling their subscriptions can result in recovered revenue that would have otherwise been lost. With the right procedures and technology, this is easy to do, making SaaS subscription dunning one of the simplest yet most effective ways to increase revenue.

What Does Dunning Management Involve?

Dunning management strategies typically employ several methods and tools to avoid late payments and encourage the continuity of recurring subscriptions. Common tactics for SaaS dunning include:

  • Emailing customers advance notifications of pending invoices
  • Inviting customers to update their credit card data before their subscription expires, or alternately, using a credit card updater service to update their information automatically
  • Automatically retrying failed payments after a set interval
  • Sending customers reminders of invoices that are still pending because of declined credit cards

These methods are extremely simple and not hard to implement, but they can recover a significant amount of revenue when applied consistently over time.

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Dunning Best Practices

Following best practices can increase the efficiency of your dunning management strategy. Here are five of the most important best practices to follow when doing SaaS dunning, including tips on how to automate these methods using Chargify’s B2B SaaS subscription management platform.

1. Prevent Payment Failures

The foundation of a successful dunning strategy is taking steps to prevent accounts from going past due in the first place. Chargify’s administrative interface provides out-of-the-box settings which let you take two important steps to keep accounts from going past due: card expiration emails and payment reminder emails.

Card expiration emails

You can enable card expiration emails so that your customers are notified on the 1st, 15th, and 23rd days of the month prior to expiration.

You also can see a dunning report with a list of subscriptions with expired cards, if you wish to manually contact them individually. You can generate a customized URL to link your customers to a payment update page, making it easy for them to enter new credit card details.

Please note that as a security measure, clicking on the Self-service Page link will log you out of the Chargify user interface. You can avoid this by right-clicking on the link and opening it in a different browser.

Payment Reminder Emails

You can also enable payment reminder emails so that customers are notified three days before payments are due. This enables them to update credit card details before a billing attempt is made.

2. Communicate with Past Due Customers

For cases where your prevention strategy fails, you can plan what happens when a customer’s account becomes past due. Develop policies for:

  • How many days will you continue retrying the customer’s card before canceling the account?
  • How many times will you notify the customer during that dunning period?
  • What will be the tone and content of those emails?

Use answers to these questions to define standard operating procedures and develop email templates for communicating with past-due customers.

Dunning Communication Tips

When applying this strategy, follow these tips for best results:

  • Incorporate phone calls and conversations and not just email into your dunning communication strategy. Remember your clients are people. A phone call or a face-to-face conversation often can be more personal and effective than an email, helping quickly clear up any miscommunications. 
  • You may choose to notify the customer immediately with a gentle reminder to update their card. You can then set an interval before the next reminder and shift the tone of the next dunning notice so that it’s more urgent.
  • How frequently you send dunning reminders should be proportionate to the number of days you set before you cancel an account. In our experience, you should send at least two emails before cancellation.
  • It’s important to include {{update_url}} in the body of the email. This takes the customer to the customized credit card update page referenced above. Or if you use Chargify’s Billing Portal for customer account management, you can use {{subscription.billing_portal_management_url}}.

Use these tips to optimize the effect of your dunning communications.

3. Monitor Past-Due Accounts

Proactively monitoring past due accounts allows you to focus on customers who need payment prompting. Chargify makes it easy to track past-due accounts. You can filter your subscriptions by product, version, and status. You can further refine the search using keywords.

To get started, click on the Subscriptions tab on your dashboard.

In this case, we can filter for past-due customers to generate a dunning list. You can then review your dunning list at your convenience. There are links to each subscription so you can easily access detailed individual subscription data. You also can export the subscription data in CSV format to generate a dunning list of past-due subscribers in that format. Contact information is included for each subscriber so you can augment the Chargify dunning process with phone calls or emails initiated by your customer success team.

The file includes the date the subscription became past due. You can calculate the number of days since dunning began to determine which email reminders already have been sent to the customer. You can also track the number of days remaining before the subscription is canceled.

The following is an example of an edited CSV file listing past due accounts. Most fields have been hidden for this demonstration. They can be unhidden to show full subscription detail.

Some merchants use this file to determine when they will stop providing service to a customer. For example, a merchant may suspend shipments to a customer after five days but not cancel the subscription for non-payment until 21 days after the due date.

In addition to filtering the subscription list for past due accounts, you also can see subscription activity on your dashboard. For example, you can see all Subscription Status changes. This would include accounts moving from Active to Past Due, or vice versa, as well as cancellations and completed trials. There is a link to the overview page for each subscription for ease of reference.

4. Reactivate Cancelled Subscriptions

Another dunning best practice is to give customers opportunities to reactivate canceled subscriptions. With Chargify, if a customer updates their credit card information before account cancellation, the outstanding amount is charged immediately, and the subscription returns to an active state. Once a subscription is canceled, it must be reactivated manually, unless you build custom logic via Chargify’s API.

There are many possible options for reactivation. Some merchants may charge a prorated amount or keep existing billing dates. Others may clear an outstanding balance and change the billing dates. Trial periods also may be included. There are many approaches.

Chargify’s default method, which you can initiate manually, resets any current balance and processes a full periodic charge. The billing date is reset to the date of reactivation with the renewal date updated accordingly.

If you don’t want to charge the customer upon reactivation, you can use a balance adjustment to create a negative balance on the account and then opt not to reset the balance. The reactivation cost will be offset by the credit balance and the customer won’t be charged.

For more information on subscription reactivation, check out docs.chargify.com/reactivation.

5. Use AI Tools to Optimize Your Dunning Process

Artificial intelligence can enhance your dunning process. A subscription management platform with AI dunning tools can determine a client’s preferred method of communication. It also can identify the best time to reach out to them to increase the likelihood of a prompt response.

Automate Your SaaS Dunning Management with Chargify

SaaS dunning provides one of the easiest ways to increase your revenue by using strategic communication with customers to reduce churn. To gain the most benefit from dunning, you should combine dunning management best practices such as automated credit card updaters and email reminders with a subscription management software solution designed to support them. Chargify’s subscription management platform provides all the built-in dunning software tools you need for efficient automated dunning following the best practices recommended here. Talk to our sales team about your needs or try it free to see how it works for yourself.

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