Dunning is the process through which business owners attempt to collect payment from consumers who owe them money. It is a process of contacting customers to ensure accounts receivable collection.
Dunning is the practice of collecting, seeking or notifying customers of money they own to the company. With automated dunning as a part of a billing system, companies use dunning process best practices to inform clients about their billing cycle and collect due payments.
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Dunning is the process of methodically communicating with customers to ensure the collection of accounts receivable. Communications progress from gentle reminders to threatening letters and phone calls and more or less intimidating location visits as accounts become more overdue.
Dunning is not exactly a new practice and in the past, it had a bad reputation. Businesses have been using this practice to collect debts from customers for ages.
With new approaches, the dunning process has become more “customer-friendly” and can actually improve the business-customer relationship.
The dunning process involves acquiring further payment details directly from the customer and seamlessly clearing payments behind the scenes. Furthermore, it allows customers to use their existing card information, payment by bank transfer, PayPal, and other payment methods.
This technique mainly prevents unintentional customer churn and boosts customer lifetime value (CLV). It’s convenient for subscription businesses because customers don’t need to enter payment information for each transaction. But it’s putting the recurring payment at risk of being out of current over time. This can happen if a customer’s credit card has been denied or they are unable to purchase since they do not have sufficient funds in their account.
Customers sometimes find this practice threatening since dunning can come off a little intrusive. It can make customers reluctant to share their private information with businesses and make it harder for companies to deal with uncooperative clients. For companies it’s important they find out what best practices work for their dunning process and use them appropriately.
Pre-dunning vs. post-dunning
Pre-dunning is a process where the business contacts the customers to inform them that the payments will be made. The reason behind this can be that the customer’s credit card is going to expire, the billing cycle is the due date, or it is the time for the first payment after a free trial ends.
On the other hand, post-dunning is the process where the customer missed the payment deadline. At this point, the company can assume that either the client is not receiving the notifications to update their billing information or that they have chosen to let the subscription expire on its own.
Two things can happen when a payment fails. If a company does not reach out, the customer leaves. If the business reaches out to the customer, there is a good chance the payment is received, and they keep the customer.
Businesses can have different ways of informing customers about payment issues. In the past, it was done mainly by mail. Today, best practices in the dunning process include sending “warning” notifications through email, SMS, or push notifications in applications.
Companies can also offer the option of annual subscriptions, avoid missing monthly payment deadlines, and allow customers to be more relaxed by paying a yearly rate.
When it comes to business, the only worse thing than a customer who is not paying regularly is a customer who cancels a subscription.
If a company wants to keep its customers, it must create strategies to benefit them and its customers.
Previously, businesses sent “pre-dunning” reach outs to customers to notify them about the upcoming payment date. This method is rarely needed today, thanks to automated card update technology developments. When someone signs up for a subscription service, they want to be charged automatically and not worry about it.
Here are some of the promising strategies a business can implement:
- Recognizable structure, predetermined and consistent framework
Businesses should stick to their framework, and if they choose to change it or upgrade it, they should notify customers on time
- Dispute management processes
Business should know how to solve disputes by validating the claim and authorizing the deduction; this can reduce the overdue balance and improve cash flow, and solves customer disputes faster
- Customer engagement
Businesses should engage and build stronger relationships with customers with services such as offering customer service
- Multiple options
Businesses should offer customers multiple payment choices, including credit card, PayPal, or invoice-based billing.
Why do we need Dunning Management?
An automated payment collection system called dunning management is activated every time a payment fails. A Dunning Management System knows the customer’s past payment behavior and any other detail regarding the customer’s payment information.
With this process, they have an insight into cardholder names and expiration dates to automatically inform customers of any billing or credit card-related issues. Customers are notified of the payment failure via email, SMS, or in-app notifications. After that, the payment recovery process begins.
Dunning Management System can help subscription-based businesses to adapt several intelligent subscription payment rules. It can also help simultaneously target the sources for hundreds of credit card declined payments and reduce them significantly.
Dunning management enables businesses to reach out to customers in advance to adjust their payment methods. It further allows them to avoid service disruptions and provide a pleasant customer experience. This can benefit the business by reducing income loss due to involuntary churn.
On the other hand, effective dunning management can help you recover a significant part of annual recurring revenue or, on average, 9% of your Monthly Recurring Revenue (MRR) and reduce subscriber attrition.
Good dunning management software enables a business to:
- Set up intelligent retries for failed payments
- Send reminders about outstanding dues from declined credit cards
- Alert customers through emails that something had gone wrong in their last transaction
- Request customers partake so that payment information can be directly updated from providers
Dunning management software solution
Payment recovery software, sometimes known as a dunning solution, informs clients about overdue payments for memberships and subscriptions. This can be a standalone software or in most cases a part of billing software for Billing and Revenue Management (BRM).
A dunning solution uses an automated process that takes steps to contact customers about collecting payments due for subscription-based services. For instance, this can occur when a customer’s credit card is declined or they don’t have enough balance in their account to make a purchase.
Automated Dunning refers to the complete process of dealing with frequent accounts receivable payment concerns. Dunning is all about supporting your clients in making timely payments in today’s subscription economy. The priority is to ensure that clients do not lose access to the services. Businesses utilize digital tools like dunning to send clients timely reminders and updates about upcoming and failed payments.
Automated dunning is a system that notifies customers of those overdue amounts and past due accounts. Businesses can use the software to send unique and customized updates both before and after payment deadlines. With this process, customers are notified about amounts they either missed or are due to pay. The dunning software, if set up right, will send automated emails, SMS, and app updates to communicate with customers.
Benefits of automated dunning
- Increased cash flow
Automated dunning increases cash flow by ensuring payments aren’t missed and forever left unpaid
- Time Savings
With automation, the employees will have more time to focus on other tasks
- Lower costs
Companies need less administrative help to follow up on past accounts
Automated dunning boosts customer engagement and provides better relations
- Reduction of unintentional churn
Automated reminders and notifications reduce unintentional churn
- Less failed payments
Pre-dunning notifications reduce the rate of failed payments
Dunning and Credit Cards
Businesses tend to experience late or failed payments regularly. Dealing with missed payments and declined credit cards serve to recover lost revenue. When a credit or debit card payment is denied, a company may send a dunning notice to urge clients to amend their payment information. When unexplained transaction problems occur, dunning detects them and instantly notifies customers with correct, accurate feedback.
There are a couple of reasons why credit card payments fail:
- Incorrect card details
The card holder’s name, card number, expiration date, or some other information is not accurate
- Status of the card
The card can be expired or has some limitations
- Geographic location
Geographic location can sometimes cause problems because of different currencies, time zones, or state regulations
Can dunning prevent involuntary churn?
The practice has shown that dunning can help businesses prevent subscription cancelations, that is, involuntary customer churn. Involuntary customer churn occurs due to payment failure or another factor unrelated to the company.
While businesses focus on prices, data, and analytics to prevent churn, they sometimes overlook a few critical operational measures like dunning and collections. These are simple to apply, can save you a significant amount of money in terms of resources, and significantly affect churn rates.
There are a few dunning process best practices for this:
- Card expiry notifications
Setting up a billing system that automatically alerts customers 14 days or seven days before their stored card is due to expire
- Automatic account update
Updates on payment information online in a self-service manner and
- Renewal notifications
Alerts on the upcoming subscription renewal and confirmation of the renewal
Improving Customer Experience
We already established that dunning is not always a pleasant process for customers. So, how can businesses make it seem less threatening and more agreeable? It’s simple, a company must test and apply the best practices in the dunning process that works for their customers.
Turning dunning into a positive customer experience, first, you have to know your audience. Every customer is different, and this is why communication is crucial. When dunning, businesses must be careful with their approach. They must have different ways of informing customers (email, SMS, in-app notifications, etc.). Another critical factor is adaptability. It is essential to meet customers halfway and understand their needs and problems.
Finally, self-service is beneficial to both businesses and customers. Companies that offer self-service tend to have a better relationship with their customers because they provide more options.
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