What Is Dunning Management: A Comprehensive Guide

Companies that work on a subscription basis can often face failures in the customer notification system. For example, a customer may be refused payment or the transaction may not go through. Such cases are rare, but because of them, a company can lose up to one fifth of its income.

In such situations, you can manually deal with each client, but this option is only suitable if you have a small customer base. If you are a big brand with a large customer base, calling or writing separately to each client is not your option. What you need is an automated process for correcting payment failures. Something like technical support, where the client can get in touch at any time and immediately receive feedback: such software is called dunning management.

In this article we will talk about the advantages of dunning management, why it is important, and how best to use the dunning management strategy.

The payment recovery process that is triggered when a payment operation fails is called dunning management.

Problems with card payments can be caused by various factors:
- Outdated card information;
- Processing errors;
- Lost or stolen card;
- Insufficient funds on the card;
- Card authorization failure.

Much of the above is solved by preliminary reminders. The customer is informed in advance that the card is about to expire.

Sometimes it becomes necessary to repeat the payment. In this case, the client is notified of the failure of the payment, then the system repeats attempts to complete it. This procedure is the most effective.

Without automating these processes, you lose a lot of time that you could spend on other business processes. If you do automate them, you won't have to manually send reminders to your customers when processing declined payments.

Also, dunning management reduces bad debt: this is money written off by a company as an expense after it fails to collect it from a client. The less bad debt your company has, the healthier and more efficient it is. Proper use of reminder management tools dramatically reduces this risk.

In addition to this, dunning management minimizes potential collection costs. In other words, prompt and timely payments minimize the time and money your company spends trying to collect overdue invoices. This, in turn, also reduces the risk of legal costs or the sale of debt to third-party debt collectors.

Dunning management keeps your earnings moving by automatically responding to failed payments to improve your workflow.

Dunning management is an important part of building a relationship between a company and a client. Good dunning management has a number of advantages.

Any outflow of customers is a loss of money for your company. Even if it’s only a small percentage of people, in the long term, this handful of customers who have left your brand can lead to a loss of hundreds of thousands of dollars.

There are two types of customer churn: voluntary and involuntary.

• A voluntary outflow of clients occurs when the client himself has decided that your offer is no longer relevant to him. Perhaps he decided that he no longer needed this service at all, or perhaps he went to your competitors. In this case, the best thing you can do is to improve your product and work on pricing so that your service is one of the best on the market.
• Involuntary outflow is associated with problems regarding payment for services. The client may like your service and he did not plan to abandon it, but a failure in the program led to the fact that the subscription payment transaction failed, and the service ceased to be available to your client. This is an example of a situation of involuntary client outflow.

This problem can be solved by using good software for dunning management. Such software includes notifying customers about payment, error alerts, helping customers in case of an error, and so on. Dunning management software will save you from involuntary outflow of customers, which means it will prevent the loss of profits.

This point follows from the previous one: good dunning management can significantly increase your income.

As we mentioned earlier, a small outflow of customers will occur in any case, but other customers may simply be forgetful.

People don't always remember which services they are subscribed to, and it's absolutely normal to remind them about your product/service. Some companies believe that reminders can annoy customers, but in practice, it turns out that customers often forget about their subscriptions, and may even be grateful for your reminders.

Moreover, it will be better if you have several dunnings for customers, because as a rule, they can ignore the first dunning. So feel free to send reminders multiple times.

The goal of this strategy is not to lose those customers who simply forgot that the payment failed, or some other error occurred.

You also need to give clients time to fix the problem. For example, you can offer a grace period while a person solves a payment problem.

Another advantage of dunning management is saving time. When requests are processed manually by employees, it still takes more time than if it’s done automatically.

In addition, it is impossible not to take into account the factor that people tend to make mistakes. Not all requests processed manually will be executed perfectly. An employee may forget to answer someone, or may make some mistake in writing the name, for example. In fact, it's nothing terrible, but it may alienate the client from continuing to use your service. When you use automated software for dunning management, the risk of error decreases significantly.

When you automate your dunning process, you can ensure that payment collection goes smoothly for your customer base without further intervention. In that case, you could let your payment processor handle them while your customer success team focuses on collecting payments from enterprise customers.

That way, you’d be covering all the bases of recovering revenue while optimizing your company’s operations at the same time.

In the end, when you have more money and more time, you can allocate those resources where they are needed most.

All these advantages can be combined into one: the best quality of customer service. Dunning management is one of the most important parts of building a good relationship between a client and a company.

Not only is the product important, but also your communication with the client. And if your dunning management is set up in the right way, then you will be able to increase not only your profit, but also credibility in the eyes of the client.

Most companies agree that the best channel for communication with a client is email. The content of the email is also important: it should be polite, empathetic, and at the same time encouraging to action. The email should contain all the useful information for the client and any links that may be useful.

An error in payment is not your client's fault, but this problem must be solved together with the client.

In subscription businesses, credit cards are most commonly used for payment processing. While it eases the entire payment process, a simple glitch in the payment network can lead to a transaction failure and spoil your income. Dunning management solves this by identifying failed transactions and initiating communication with the customer to recover payments.

As already mentioned in the advantages of dunning management, this approach saves time. Not only your time, but also the time of your employees and customers. Instead of spending hours checking and drafting emails individually for each customer whose card has been declined, the billing system does this on behalf of your business. You can even customize the emails before sending them to customers. You can use the saved time and money to build more important strategies for your business.

Although email is an effective medium, it’s important not to completely rely on it, especially when your customer base grows geographically. Apart from email, SMSs can be used as an additional channel, as research shows that SMS open rates are as high as 98%, compared to just 20% of all emails. Furthermore, adding CTAs to platforms or portals where customers often visit and guiding them to the next set of actions may produce better and faster results.

There are several ways how you can apply dunning management. Below we will look at some of the most effective strategies.

When a money transaction fails, the system automatically tries to log into the client's account a second time to collect the required payment. But the fact is that with each repeated attempt there are costs. And if there are too many attempts, then this may not affect your company's income and expenses in the best way.

The solution in such situations is smart retry logic. The point of this strategy is that the system repeats the attempt to log into the account based on numerous factors that should eventually lead to a successful transaction. When using this strategy, the cost of repeated attempts is reduced, because now the system makes an attempt for a reason, and takes into account the time zone, payment gateways, and the brand of the card.

The intelligent retry schedule is dynamic and relies on clients' financial models.

Intelligent retry mechanisms can also be based on the error code. Basically, there are two cases: hard decline and soft decline. What is the difference?
A hard decline occurs in cases where the problem cannot be solved quickly, for example, when the card is stolen or invalid. The client may be powerless in such cases. In case of such an error, the code may be Invalid Card or Do Not Honor. In this case, a second attempt to make a transaction will not work, and you will need to contact the client directly.

A soft decline is a problem that the client is able to solve. The reason for a soft decline may be a lack of funds, exceeding the limits of the card, or an expired credit card. In this case, it makes sense to wait and repeat the transaction after some time. For example, say a client has insufficient funds in his account, the transaction is rejected, a few days later he replenishes his account, and then the transaction is successful.

Everything described above will be done for you by the software; we just explained the mechanism of how it will work. Like other dunning management strategies, this method is also aimed at avoiding involuntary churn.

This strategy consists in the fact that when the validity period of a customer's credit card comes to an end, a notification is sent to him by email. The notification must be sent in advance so that the client has time to solve this problem.

However, if you send a series of emails to a client saying that his card is expiring, undoubtedly this can minimize involuntary churn, but be careful, because these letters may fall into the "spam" category and the client may not see them, or they will start to annoy him. So it is important to find a balance here between a quick and effective solution to the problem and reminding the client about your services.

Automatic Account Updater is a service offered by payment card networks that ensures that the merchants have up-to-date card details of their customers by frequently checking them for updates with the card networks.

A customer’s card information can change for several reasons. They might receive a new card due to updated technology, or simply replace a lost card. While you should allow your customers to update their payment information on their own, you cannot solely rely on them to do so.

Automatic Account Updater enables you to collect updated credit card information such as new card numbers, contact information, and expiration date directly from the credit card providers by detecting changes in the card information.

Dunning management is an excellent tool to avoid involuntary churn, and, as a result, to avoid financial losses. Moreover, dunning management saves you time and resources, and makes interaction with customers much faster and more efficient.

It is important to consider dunning management not only from the point of view of maintaining income, but also from the point of view of maintaining good relationships with your clients and building a respected brand reputation.

Reminders for customers may seem like a trifle, but this factor should not be underestimated. A good reminder strategy can strengthen your brand on the market in the long run.

So, now that we have convinced you that dunning management is a useful and necessary tool, we want to draw your attention to other aspects of the business, such as price optimization. This task can be handled by Priceva’s Retail Price Optimization service. Just like dunning management, this is a strategy that should not be neglected, because it can help you achieve your business goals.

Smart dunning is an automated process of reminding customers who have failed to pay their bills by sending personalized messages and offers, with the goal of reducing churn and improving customer retention. It uses data analysis and machine learning to identify the most effective messages and channels to reach each customer.

A dunning invoice is a payment reminder that is sent to a customer who has an outstanding balance on their account. It typically includes details about the amount owed, the due date, and any late fees or interest charges that may apply. The purpose of a dunning invoice is to prompt the customer to pay their outstanding balance and avoid any further collection actions.

Dunning reports are financial reports that detail past-due accounts and the efforts made to collect the outstanding balances. These reports are used by businesses to monitor and track their accounts receivable and identify customers who have fallen behind on payments. They can also be used to develop strategies for improving collections and reducing delinquency rates.