Subscriber churn is a key concern for subscription businesses. When subscribers leave, the business loses both current and future recurring revenue. Of course, some churn is “involuntary”—occurring as a result of a failed payment rather than a subscriber cancelling deliberately.
This post describes how Recurly ensures that the dunning process is as effective as possible for collecting on accounts receivables in order to reduce involuntary churn. This post is the second in our series on mitigating involuntary churn. You can read the first post here.
Dunning and the collections process
Dunning is the process of communicating with customers (usually by email) to try to collect on payments due. In effect, discussions about dunning are really discussions about the customer communications which are sent when invoices are not paid by their due date.
Did you know? The word “dunning” stems from the 17th century verb dun, meaning to demand payment of a debt.
Getting paid promptly and fully is obviously important for any business. For subscription businesses that sell digital goods, a customer’s payment status can determine whether the business continues to provide the service or puts it on a temporary suspension while the account is delinquent. Thus, letting a customer know that they are going to lose service is critical.
Physical goods merchants are in a different position. If an invoice is not paid after the product has been shipped, the product can’t be recovered, so non-payment is a large burden on these businesses and their costs.
The dunning process also differs depending on the payment type. For ‘automatic’ (credit card) invoices, the due date is essentially the date the invoice is issued. For manual invoices (for example, those paid by check, wire, ACH, etc.) the due date can be a set number of days after the invoice is issued. If the invoice is not paid by the due date, the dunning process begins.
How Recurly addresses dunning differently from other subscription or payment platforms:
Other solutions tie dunning to retries, and the two processes function essentially as one. At Recurly, we’ve improved the collection process and increased the amount of revenue we’re able to recover by separating the dunning and retry processes.
Recurly decided to separate the two processes because we’ve seen how different industries experience very different rates of churn, making a one-size-fits-all dunning process less effective at combating churn. The dunning process needs to function independently from the retry process in order to achieve the best results. Other subscription billing products which tie dunning to retries are not able to achieve the level of results that Recurly does. Those products and their less-responsive dunning schedules leaves money on the table—money that Recurly recovers.
So, how does Dunning work?
The process below is applied to renewal invoices. If the credit card payment fails—meaning the payment is rejected by the bank—the renewal invoice enters the dunning cycle. Manual invoices enter dunning when payment is not received by the specified due date.
Step 1: An invoice has not been collected by its due date
Step 2: Recurly (on behalf of the subscription business) immediately sends a “payment declined” email to the customer. The email contains information about what happened and how the customer can update their payment information, either via a handy link in the email or with other instructions for manual invoices
Recurly provides this form, or the business cancreate their own using Recurly.js.
Step 3 (optional): The system sends additional emails on a customized schedule, as specified by the business.
Step 4: If the customer does not update their payment information (and none of the other recovery strategies that Recurly employs are successful) the invoice will fail. Most merchants choose to cancel the subscription so that it does not renew again.
Step 5: When the subscription is cancelled, the customer is notified via an email which contains a link to pay their invoice and re-subscribe.
Recurly knows our customers work hard to acquire and retain subscribers and that losing subscribers due to failed payments is a serious concern. At Recurly, we continually analyze our billing and transaction recovery processes to identify ways that we can make adjustments to improve results. Separating the retry process from the dunning process results in meaningful increases in a business’ monthly transaction recovery rate—adding more revenue to their bottom line each and every month.
Be sure to look out for our next blog, in which we’ll outline additional best practices that can make your dunning process even more effective.