The SaaS guide to dunning management

Alvaro Morales

There’s no denying it — reaching out to customers to remind them that their payments are overdue can feel invasive and awkward.  

With a solid dunning management strategy, you can make payment collection easy and frictionless for your team and, most importantly, your customers. 

In this article, we’ll discuss why it’s important to have a solid dunning management system in place and how to implement it correctly. 

We’ll go over:

  • What dunning management is
  • Why it’s crucial for SaaS
  • Key components of a solid dunning process
  • How to set up a dunning process easily
  • Some tips to make it more effective
  • How a specialized billing solution can help 

Let’s get started.

What is dunning management?

Dunning management is the process of systematically communicating with customers to ensure they pay their overdue invoices. It's about keeping the payment process running smoothly, even when hiccups happen. 

Think of it as a proactive approach to preventing those awkward "your payment didn't go through" situations.

For SaaS companies, dunning management is essential. Things, like expired credit cards, network issues, and insufficient funds, can disrupt the payment flow — even with the best of customers.  

Without a good dunning system in place, these small issues can lead to lost customers and decreased revenue. That's where dunning management steps in to prevent these little nuisances from becoming more major cash flow emergencies. 

SaaS companies face many challenges with failed payments and account delinquencies. Here’s a quick look at some of them:

  • Involuntary churn: Even your most loyal customers can accidentally lose access to your service if something simple happens, like a credit card expiring. This is frustrating for both you and the customer.
  • Lost revenue: Every failed payment means money left on the table, affecting your bottom line.
  • Wasted time: Manually chasing down late payments and addressing billing issues can eat up valuable staff time.
  • Strained customer relationships: Awkward conversations about unpaid invoices can harm customer trust and loyalty.
  • Lack of visibility: Without proper tracking, you might not fully understand the extent of payment failures or their underlying causes.

Why dunning is important in SaaS

Picture this: You provide an impeccable software service, customers love it, and they pay on time. Everything runs smoothly, and nothing seems out of place. But even in this ideal scenario, dunning is still important. Why? Two main reasons:

1. There’s a hidden cost in involuntary churn

Involuntary churn is the silent killer in SaaS. It's when customers leave your service not because they don't want it, but because a simple payment issue wasn't resolved in time. Whether it's an expired card or a temporary hold on their account — these glitches can cause big problems. 

It's frustrating yet entirely preventable. Dunning helps you catch these issues early and contact customers, keeping your churn rate low and everybody happy.

2. Cash flow is king

There’s no two ways about it, cash flow is the lifeblood of any business — especially a SaaS company. Subscriptions rely on a steady stream of recurring payments. When those payments get delayed or lost, your revenue takes a hit. 

Dunning management keeps money flowing by:

  • Automating payment retries, making it easy for customers to catch up if the first attempt failed.
  • Sending timely reminders before small issues turn into large unpaid balances.
  • Offering easy-to-use ways for customers to update their payment information.

Remember: Contrary to popular belief, dunning isn't about being pushy; it's about protecting the health of your SaaS business. 

What makes a dunning process effective?

A good dunning process is about clear communication, timely action, and providing the right solutions to help customers get back on track with their payments. Let's break down the key components to make this happen:

1. Your communication strategy

The way you talk to customers about missed payments has a huge impact on their response. The golden rule is to be clear, polite, and consistent.

  • Clarity: Avoid jargon and complicated legal terms. Simple language goes a long way. Tell them exactly what's overdue, when it was due, and what the next steps are.
  • Politeness: Remember, even the best customers sometimes have payment hiccups. Show empathy. A friendly, understanding tone goes a long way.
  • Consistency: Standardize your messaging. Having pre-written email templates ensures that every customer receives the same professional, helpful communication.

2. Timing and frequency 

When to reach out and how often is tricky. Too soon, and you might annoy customers; too late, and the problem becomes harder to fix. Here are some best practices you should follow:

  • Be diligent but gentle: A friendly reminder right after a payment fails strikes the right balance between being rigorous and considerate.
  • Escalate gradually: If initial reminders don't work, increase the urgency a bit with each message. However, don't bombard customers daily or threaten legal action when it’s uncalled for. 
  • Spacing: It is usually best to let some time pass between reminders (a few days to a week), giving customers the chance to address the issue on their own.

3. Payment options and flexibility 

Sometimes, customers can't pay the full amount right away. Providing options makes it easier for them to get back on track and protects your revenue. Consider the importance of:

  • Payment plans: If the overdue balance is large, let customers break it down into smaller chunks.
  • Alternative payment methods: In addition to credit cards, options like direct bank deposits or online payment services can make things easier for some customers.
  • Customer service: Provide readily available support channels (phone, email) so customers can contact you if they need a personalized solution.

How to set up a dunning process

Setting up a dunning management system can seem pretty complex. Here’s a quick 3-step guide to help you get started:

Step 1: Initial setup 

Tailoring your dunning process to your SaaS business is important! Start by answering the following questions:

  • How long will you wait before marking an account past due? Consider your billing cycles and customer payment behaviors.
  • How many reminder emails will you send, and how often? A few spread out over time is a good starting point.
  • What tone will you use? Start friendly and gradually increase urgency, but always remain professional.
  • When will you cancel subscriptions due to non-payment? Set a clear threshold, but be willing to adjust it for individual circumstances if needed.

Step 2: Using automation tools

Manually sending emails and tracking payments is a recipe for lost time and lost revenue. Here's where automation is your best friend:

  • Dunning capabilities: Modern SaaS billing platforms (like Orb) have built-in dunning features, including automatic retries and customer self-service portals where they can update payment details.
  • Specialized dunning management software: If your billing system lacks strong dunning options, dedicated dunning software can handle the communication and retry logic, integrating with your existing tools. One popular option among SaaS companies is Churnkey.

Step 3: Integration with billing systems

A well-integrated dunning process is like a well-oiled machine! Here's how to get everything connected:

  • Your billing system is the core: Make sure your dunning tool can pull in customer data and payment status directly from your billing system. This will save you a lot of time and avoid sloppy errors.
  • CRM integration: Linking your dunning process with your CRM gives your entire team a full picture of each customer's account status and communication history.

Tips for a successful dunning management strategy

To make your dunning management a breeze and ensure you’re getting your money collected on time, here are some useful tips:

1. Embrace segmentation and personalization 

As you know, not all customers are alike. Using data wisely is key to getting those overdue payments back on track. Consider these factors:

  • Payment history: First-time missed payment? They probably just need a quick reminder. Chronic late-payer? A more direct approach (such as an email addressing the issue or even a call) might be needed.
  • Account value: Give extra attention to high-value customers who are overdue. Consider reaching out personally or offering more flexible payment solutions. Providing customers with this white-glove treatment goes a long way. 
  • Customer type: A large enterprise client might need a different communication style than an individual subscriber. You can get away with being slightly less formal with individual users, but the tone might have to change when dealing with larger companies.

2. Use A/B testing as a secret weapon

Never assume you've reached the perfect dunning process. A/B testing lets you experiment and discover what works best for specific customer groups. Try the following:

  • Subject lines: Does "Payment Issue" get more eyes on your email than "Important Account Notice"? Test it out. 
  • Timing: Experiment with different email schedules. Maybe sending reminders earlier in the day yields better results.
  • Offers: See if including an option for a payment plan leads to faster resolutions.

3. Have a clear roadmap for escalation

Know exactly what happens at each stage of the dunning process, and keep everyone on your team informed. Consider the following strategy:

  • First reminders: Start with friendly, solution-focused messages. You want to keep them in the loop about what’s happening.
  • Urgent warnings: When the account is seriously past due, let customers know that service interruption or cancellation is possible. You want to adopt a more serious tone in your messaging. 
  • Final notices: Before taking action, send a clear final notice outlining consequences — like subscription cancellation — if payment isn't made.
  • Service discontinuation: If all else fails, have a well-defined process for temporarily halting services, along with plans to reactivate customers quickly once payment is resolved.

A word of advice: Always stay within legal guidelines, especially when it comes to fair debt collection practices. Provide customers with readily available contact information to discuss their situation and work towards a solution whenever possible.

Next steps

You should now have a clearer picture of SaaS dunning management, its importance, and the best practices for making it effective. 

Armed with this knowledge, you’re ready to start implementing a dunning management strategy that keeps your cash flow healthy without putting unnecessary stress on your customer-provider relationship. 

May 16, 2024

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