It’s almost inevitable for businesses to lose customers from time to time – it’s part of the game. However, there’s nothing more frustrating than losing buyers due to involuntary churn!
Involuntary churn is the loss of customers or subscribers due to reasons beyond their direct control, as the name implies.
This typically happens when payment issues occur, such as expired credit cards, insufficient funds, or bank declines.
As the most common cause of involuntary churn is failed payments, having an effective dunning process in place is crucial for success.
Table of contents
- What is dunning process?
- What are the reasons for failed credit card payments?
- Benefits of an effective dunning process
- How to create a successful dunning strategy?
What is dunning process?
According to its definition, dunning in finance refers to the set of processes involved in recovering lost revenue from failed and declined credit card payments.
In older times, dunning meant a number of different strategies, such as verbal reminders, warnings, dunning letters, sending collection agents, or other intimidating procedures to demand repayment.
For modern subscription businesses, failed payment recovery is all about assisting your clients to make timely payments. The focus is on ensuring that customers get access to the services they enjoy without any interruption.
Today, a successful dunning strategy includes delivering timely reminders and updates regarding upcoming and failed payments, for instance.
You might also like reading 8 cart abandonment reasons and how to solve them.
What are the reasons for failed credit card payments?
The four most common reasons are:
- expired credit cards;
- insufficient funds;
- incorrect billing information;
- fraudulent activity suspected by the bank.
When payments fail, you can either sit back and wait for the customer to notice the issue.
Or, you can be proactive and reach out to your buyers to solve the problem.
Let’s see why the first scenario isn’t an option!
Benefits of an effective dunning process
Having an automated dunning process in place is almost mandatory if your company uses a subscription billing model or collects donations.
Why?
1. An effective dunning strategy saves 9% of your MRR
Did you know that on average, SaaS companies lose about 9% of their monthly recurring revenue due to failed payments and involuntary churn?
Involuntary churn happens when a customer loses their account and membership to a service unintentionally. It’s usually the result of a failed payment that never got fixed.
2. A successful dunning process ensures seamless service
Unless you have an effective dunning process in place, your customers can experience service disruptions if their monthly payments fail.
Depending on the type of business you run, every minute of unnecessary service interruption can mean potential lost revenue for your customers!
3. A graceful dunning process helps to increase customer satisfaction
An effective dunning process not only helps you make more revenue, but it also helps your customers!
Remember: buyers who have failed payments usually don’t want to cancel their subscription. Giving them the chance to update their payment information in time ensures a better customer experience and increased loyalty in the long term!
How to create a successful dunning strategy?
Now that you know the what and why, let’s talk about how you can design a dunning process best practices!
First of all, you should know that an effective dunning management consists of three stages:
- pre-dunning;
- dunning;
- post-dunning.
Let’s take a closer look at each!
Pre-dunning
Some experts claim that pre-dunning is unnecessary in many cases, as over 70% of upcoming expiration dates get updated behind-the-scenes.
This is partly true since many payment platforms (such as Stripe, for instance) will automatically update cards.
However, let’s take a closer look at those two scenarios where it’s worth sending a reminder to your customers!
- Long delays in between billing periods – Long durations between billing periods mean there’s a higher chance of failed credit card payments. Therefore, it may be worth sending a reminder to your biannual or annual subscribers to ensure their payment details are up-to-date!
- First payment after a free trial – It’s in the interest of both your customers and your company to be transparent early on about when you will start asking for a subscription fee. Therefore, you should always remind your buyers in time that their free trial is approaching its end.
Dunning
Let’s see the steps involved in an effective dunning process!
Step 1: Identify why your buyer’s payment failed
In case of a failed payment, your first step will be to identify the reason behind the event.
Credit card expiration is by far the most common reason for failed payments. While a pre-dunning process can help capture some of the expiring cards, some cases will still require a proper notification sequence.
In case of insufficient funds, it’s a good idea to ask the customer if there was a better day of the month to process their payment.
Sometimes, failed payments can be traced back to payment gateway errors. Therefore, monitoring the logs of those error messages is a vital part of your dunning process!
Step 2: Formulate and send the dunning email
In case a payment fails, you should send an email on the same day notifying your customer about the issue.
But how to formulate such a dunning letter?
First of all, make sure to personalize your email!
A graceful dunning process incorporates building trust with your customers, as people are reluctant to click on links that are requesting credit card information. Personalization helps you combat this mistrust.
Pro tips:
- Make sure to keep your brand consistent by including your logo in your emails!
- Carefully choose the “from name”: the right choice will depend on your current customer communication style. For instance, if your buyers are used to receiving emails from “Name at Your Company”, make sure to add that personal touch!
- Spice up your copy to reflect an increase in urgency. However, make sure to keep things friendly! Politely inform your customers about the failed payment. Next, prompt them to take action! Reminding them about the benefits of using your product or service is a smart strategy to make them aware of what they stand to lose if they remain inactive.
- Limit your links! A successful dunning process should include linking to a customer portal where your buyers can conveniently update their credit card information. Remember to limit the number of CTAs and links so that your customer doesn’t get distracted.
Here’s a perfect example of Hulu:
If your billing software’s features include automated payment retries, it will try to charge the card again at this point. If this doesn’t work, see step 3!
Step 3: Formulate and send the dunning email
If your dunning email is persuasive enough, chances are your customer will log in and update their billing information. Cheers!🥂
What if that’s not the case?
First, you should ask yourself: did your customer receive your email?
If it turns out that your message wasn’t delivered or landed in the spam folder, don’t panic! If you have a WordPress site, you can use the plugin WP Mail SMTP to fix the issue, for instance.
Step 4: Send a follow-up email
Once you made sure your emails are successfully reaching the inbox of your customers, the next step of your dunning process should be to send a follow-up email.
This should be a gentle reminder stating that you’re still waiting for the customer to take action.
Pro tip – Changing the sender’s name
As the urgency of your emails increases, try changing the name of the sender. For instance, if the first email came from the contact person your customer is in touch with, send the next email from the CEO!
Take a look at how Baremetrics tries to keep its customers in the loop:
Make sure to wait a few days after the first dunning email to send your follow-up!
In the case of high-value customers, try to reach out personally! Furthermore, make sure to set up a reminder notification in-app as well as a paywall when customers log in.
Post-dunning
You can continue to send a few more dunning emails (we recommend sending a maximum of 5-6 emails over 30 days). However, if after all of your attempts, the customer still doesn’t update their billing information, you’ll sadly have to accept a bump in your churn rate.
Hold on: an effective dunning process doesn’t end here!
You can make hay of the situation by asking your customers for feedback.
What led to their decision to cancel their plan?
Knowing the answer is helpful, as it provides an opportunity to reach out to these people later on. For instance, if the product’s price was the issue, you can contact them when you start offering discounts or decide to add more plans to choose from.
Learn how to configure the Stripe dunning settings
Wrap-up
Having an effective dunning process in place is especially important for subscription-based businesses to avoid involuntary churn. The above steps help you recover more revenue from failed payments and ensure an increased customer satisfaction in the long run!