How Subscription Merchants Can Improve Dunning Management

According to the industry group PYMNTS, failed payments cost subscription merchants as much as 9% - 11% of their revenue. While some of that revenue loss represents customers intentionally taking their business elsewhere, at least 25% to 50% are brought about by circumstance rather than decision - anything from credit card expiration to temporary shortages of funds or credit. A well-managed dunning process is critical to ensuring that every customer who wants to continue their subscription can - and that the subscription merchant can optimize their revenue.

What is Dunning?

Dunning is a shockingly old word, dating to the 17th century, originally meaning a demand for payment of outstanding debt. Over time, it has come to mean a more sedate set of defined communications with customers to ensure they pay their bills; and for subscription merchants, it has morphed once again to represent the process of supporting customers in making every payment they can and are willing to make.

In the subscription space, dunning may be said to be the process of communicating with customers about bills, tracking payment successes and failures, and automating the process of deciding when and how to re-run transactions. Now, companies like Butter Payments are focused on ending involuntary churn, leveraging machine learning to build robust dunning programs, helping subscription businesses efficiently recover failed payments. Unlike their historical forebears, modern subscription payment dunning processes are not generally intended to be aggressive or accusatory, but rather a subset of a customer success mindset that helps customers to maintain access to services they want.

Why Dunning Management is Important to Subscription Merchants

Given that most credit cards have expiration dates within the next two to four years, it is an inevitability that every month a meaningful share of credit card payment will fail if left unattended. The average consumer doesn’t really keep track of where their credit card number is being used for subscription payments, meaning that merchants without a plan will see a natural reduction in successful payments every single month.

That said, customer satisfaction can take a hit when a subscription payment fails, and the merchant locks them out of the product or service: while the blame may arguably be on the customer’s shoulders, they see only the delisting action of the merchant.

So dunning management doesn’t just optimize income, it also acts as an element of a subscription merchant’s customer service plan. Creating dunning processes that create seamless subscriber experiences, like this, are critical in today’s subscription landscape. 

Why Bills Go Unpaid

There are four key reasons subscription merchant bills go unpaid and need to be entered into the dunning process:

• The account was created fraudulently and the card network shuts down the card;
• The customer wishes to unsubscribe, and, rather than going through the process, simply disables (or fails to update) their credit card;
• The credit card expires and is not updated; 
• The customer account does not have sufficient funds or credit available.

There are, therefore, three important tactics for subscription merchants to optimize in their dunning management plans:

1. Ensure that the account cancellation process is clear, and that customers who don’t recognize charges can reach someone who can help. This will both reduce unexpected payment failures, and eliminate fraud-related chargebacks.
2. Use a card updater service to receive updates on expired credit cards so that you don’t miss intended payments when small details like expiration dates change
3. Automate the payment process to spot ‘hard’ and ‘soft’ declines on attempted charges so that you can decide which ones to try again either with a different payment processor or at another time

Enabling Effective Dunning Management

Executing the first tactic - providing clear cancellation processes and providing access to customer support - is relatively simple, and studies have suggested that customers are less likely to churn when they know they can cancel at any time (and cause way fewer chargebacks).

Executing the second and third tactics may take some forethought, as they could require you to automate your payment systems, and, more than likely, contract with more than one payment service provider (PSP). For those who have committed to a single PSP, particularly if it is with a full-service provider may find it a little trickier as (1) the PSP may act as the intermediary for account updating services, making them more expensive than they would be to buy direct; and (2) they almost certainly will not permit you to resubmit your soft declines to an alternative processor.

For this reason, many merchants are working with a third-party token vault provider like Basis Theory as a key piece of their payment automation. Much like a full-service payments provider, the token vault can manage the transmission and storage of cardholder data (keeping your system out of PCI-DSS scope), then enable you to send transactions to any PSP you have a business relationship with. This will then allow you to get your own credit card updater service (integrated to your token vault), and to build a broader set of PSP partners to retry soft declines.