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A Guide to the Dunning Process for SaaS Companies

Published on June 20, 2024
Joe Garafalo

Founder and COO

At its simplest, dunning means communicating with customers to collect overdue payments. This might conjure up images of debt collectors making incessant phone calls and letters threatening legal action, but the meaning of dunning is more specific — and a lot more tame.

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More than anything else, your SaaS business depends on recurring revenue and steady cash flow to survive and thrive.

But payments don’t always come through on time. Late payments can sometimes even escalate to bad debt. Luckily the reason behind many failed payments is simple: issues with the credit card on file. Customers might forget their card’s expiration date, have insufficient funds, or accidentally get their card blocked.

As mundane as these issues are, failed payments can present a big problem for SaaS businesses. In order to remove inefficiencies in your startup’s collections and cash flow, you need to have a reliable SaaS dunning process in place.

Table of Contents

What Is Dunning?

At its simplest, dunning means communicating with customers to collect overdue payments. This might conjure up images of debt collectors making incessant phone calls and letters threatening legal action, but the meaning of dunning is more specific — and a lot more tame.

Usually when we talk about dunning, we’re referring to subscription-based businesses. In the world of online, automated SaaS payments, dunning centers around credit cards. Specifically, it centers on declined payments.

If you operate a SaaS company, the unavoidable reality is that some credit card payments will be declined. This can result from clients bumping into limits, insufficient funds in an account, or card expiration dates.

In SaaS, we call this involuntary churn — where clients stop using your service, not due to a poor customer experience, but as a result of mechanical issues. Unfortunately for companies that depend on recurring billing, involuntary churn represents a huge source of revenue leakage.

Fortunately, it’s preventable, and dunning is your intervention strategy. Usually based on automated processes, a solid dunning strategy involves retrying cards, sending out emails that inform customers their payment details have expired or are about to expire, or even automatically updating credit card information directly from providers.

The main goal of dunning is to shorten your average collection time and strengthen customer retention, boosting top-line growth.

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Effective Dunning Strategies for SaaS Businesses

Successful dunning for SaaS companies boils down to two components: automation, and effective dunning communications.

How To Automate the Dunning Process

Constantly reminding customers to update their payment information can be a hassle.

Especially as you scale, writing and firing off emails each time a payment fails will be impossible to manage. By automating the dunning process, you reduce customer churn while simultaneously freeing up finance to focus on the needs of a growing business.

Step 1: Automatic retires

Fortunately, most popular SaaS billing software include automated dunning features.

With Chargebee, for instance, you can set smart retries according to a schedule and the type of payment failure. According to Churnbusters, simple retries will solve the problem of declined payments at least 21% of the time.

That’s why you might attempt retries a couple times before sending out an email, to avoid unnecessary customer engagement — if you solve the problem without them even being aware of it, all the better!

Step 2: Automated dunning emails

What if payment retries don’t work? You’ll then move to the next stage: informing customers they need to update their payment details.

You can do this with well-crafted dunning emails that are respectful while getting straight to the point.

With the right software, these emails can be fired off automatically, too. In Maxio, you can set the type of email you want to send for each situation. If the reason for payment failure was card expiry, for instance, you can automatically send off emails that include a link to a page on your website where the customer can update payment details.

Step 3: Service cancellation

If that doesn’t work? Eventually you’ll have to chalk up the account to bad debt. As part of your dunning strategy, you’ll have to decide: at which point do you cancel the subscription? Say you decide to retry a card three times, and follow up with three emails. With automation, you can usually set up the number of retries and emails that will be sent out and the cancellation terms to trigger automatically.

Step 4: Consider pre-dunning processes

With some billing software, it’s also possible to bypass retries and emails altogether. For example, by alerting customers they need to update their payment method before payment is actually attempted, known as pre-dunning.

Another option is to allow customers to have their credit card providers automatically provide updated information as cards expire. Stripe, for example, provides this service, avoiding the need for pre-dunning emails.

How To Craft Effective Dunning Communications

Dunning is a delicate process. There’s a balance between angrily insisting on payment, and being too lax, allowing customers to continue using your service for months without paying.

At the center of dunning is the simple email. Here, you’ll communicate what the problem is, and how to resolve it.

But first, you’ll need churning subscribers to actually open the email. This all depends on the subject line. This is the first thing they’ll see and, for good reason, people are cautious about emails relating to their credit card. Avoid looking “spammy” by sending emails with subject lines that don’t include account or error numbers.

Some examples of good subject lines include “[Brand Name] ACTION REQUIRED: Please update payment information for continued service” or, further along, “[Brand Name] FINAL NOTICE: Cancellation imminent – please update payment information”.

These subject lines establish trust by showing the brand name, but also get the reader’s attention by laying out the message clearly.

As for the actual email, make it obvious the message is genuinely from your company by including your brand name and logos, and match the style of your usual marketing emails. Also include contact information so customers can reach out if they’re suspicious of the authenticity of the email.

Your messages should be to the point, explaining what’s going on and what to do. Consider this example:

“Hi, we noticed your payment was declined. To continue using our service, please update your payment information. You can easily do so here [link to page where they can update details].

Thanks for your help, and we hope to get this resolved quickly!”

No need to be unfriendly. The more you can personalize the email, the better. A good example is to include specific benefits the account is getting from the product. In your closing line, you might say something like “we don’t want you to lose access to [main features they’re using].”

Use A/B testing to continuously improve your dunning emails by finding out which subject lines, and what style of content, works best for specific types of customers and specific sources of payment failure.


Reduce the Need For Dunning

While you’ll always need dunning management strategies in place, you can reduce the frequency of dunning by setting clear payment terms, and watching out for warning signs.

Set Clear Payment Terms and Expectations

One way you can avoid delinquent payments is by making sure there are no misunderstandings  — make sure customers know exactly what they’re signing up for with clear payment terms. Lay out your accepted payment methods, due dates, and any late fees.

Early Warning Signs

While there are no “warning signs” for expired credit cards or fund limits, you can keep an eye on customers who are likely to pay late.

The best way to understand customers who are likely to churn is to track payment history.

Accounts with high AR aging — meaning they are way behind in collections — present obvious problems.

You may need to proactively reach out to these customers, offering early payment perks or setting late fees. Maybe you’ll switch ICP to focus on customers who pay faster. Whatever strategy you adopt, you’ll need to keep track of your accounts receivable.


Leveraging Mosaic for Efficient Dunning and AR Management

Dunning and accounts receivable management are two sides of the same coin. That’s why, to get a true view of the effectiveness of your dunning process, you need to be able to view relevant collections metrics in real-time.

With Mosaic’s out-of-the-box billings and collections template, you can track AR aging across invoice and customer type. You can also keep a close eye on some of the most important accounts receivable metrics like days payable outstanding or AR turnover without having to dig through your ERP.

Even more useful, you can view these across customer segments to identify problem areas. When you have an understanding of which accounts are most problematic, you can smartly deploy strategies like prepayment discounts or more frequent payment reminders.

And, once you have your AR aging laid out in front of you, you can dig into the data with Mosaic’s Arc AI. For example, you might prompt it to show your three biggest customers in the longest outstanding payment “bucket” (90 days+).

If it’s time for a gentle reminder, Arc AI can generate professional, respectful emails for you — no need to guess if they’re worded correctly. You can then fill in the personalization details as needed.

When it comes to dunning, there are two AR metrics that are crucial for you to understand: days to collect and bad debt.

Days to Collect

Days to collect shows the average amount of time it takes for a customer invoice to turn into cash in your accounts. If you think about it, the ultimate goal of dunning is to shorten your days to collect. So, once you’ve put dunning processes in place, you can build days to collect into your financial models. The effect? More accurate topline models, most likely with higher revenue projections than before you put dunning in place.

With Mosaic’s Metric Builder, you can generate your actual days to collect. Your actual days to collect will always change based on the latest data from your ERP and billing platforms, which will then be plugged into your models to give you a clear picture of your current financial situation.

Why is actual days to collect so important? Well, with actual days to collect, you get a much more accurate view of your short- and long-term cash runway. If, before, you were only forecasting based on the assumption you’d collect in 30 days (as per your contracts), you may see a huge difference, sometimes in the range of hundreds of thousands of dollars. Really understanding your actual days to collect tells you when you can afford to invest in expansion, or when you need to step up retention efforts.

 

Understanding Bad Debt

Even with the best proactive dunning strategies in place, sometimes you just won’t get the payment you’re owed. These accounts turn into bad debt, recorded as an expense on your balance sheet.

It’s important to get a handle on how many of your accounts are turning into bad debt, not only for the obvious cash flow forecasting purposes, but also to understand where you should draw the line on credit policy.

With Mosaic, you can get a handle on how much bad debt you have now, and then forecast to what degree this will eat into future cash flow.

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Final Thoughts on Dunning and AR Management in SaaS

As long as your SaaS business relies on automated, recurring payments, you’ll need a solid dunning process.

The earlier you sort this out, the better — if you enter a stage of hypergrowth, for instance, involuntary churn has a nasty habit of scaling with the amount of customers you have.

At the same time, you’ll need to have a clear view of AR metrics to see whether your dunning strategy is working.

Dig into your dunning and collections processes with Mosaic. Schedule a free demo today.

Dunning FAQs

How does Mosaic help in the dunning process?

By integrating with your ERP, Mosaic helps you keep eyes on accounts receivables and related metrics such as days payable outstanding, days to collect, and AR turnover, which can show you how effective your dunning process is.

What are some proactive strategies to reduce dunning?

Can dunning affect customer relationships?

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