One of the most important topics in SaaS that isn’t too often covered, is the dunning process. For those who might not be familiar with dunning, it’s the process of communicating with customers that are past due, to collect payments before their accounts get cancelled or closed.

Dunning is usually a structured automated process whose form of communication is email or sms. For SaaS companies with a large number of customers, dunning is a crucial process with several benefits, including revenue retention, helping churn, increasing cash flow, and more efficient use of resources.

An effective dunning processes requires a lot of thought and strategy, which usually depends on what you choose to optimize for. That usually depends on the nature of your business, industry and types of customers. A typical dunning process lasts about 30 days, however that could vary more or less, depending on your business.

What strategy to use?

If you’re optimizing for revenue retention and churn prevention, than you will want to have a longer dunning period, usually 30-40 days. This is primarily the case if you’re a B2C or your customers are small businesses. This optimization strategy is ideal if you want to keep the client on as an active account, and hope to collect the revenue within the dunning period, rather than closing the account and churning the client sooner.

If you’re a business that is dependent on cash flow, you’ll want to optimize for collection time, and will likely have a shorter, more pressing dunning process. This strategy could be ideal for any type of business, whether large or small. If your business is dependent on cash flow for day-to-day operations and covering expenses, you’ll want your dunning period to be shorter, usually 7-14 days.

No matter what the nature of business you’re in, or what strategy you’re using, there are some general tips and guidelines to follow that will ensure your dunning process is most effective:

Tip #1. Be as accommodating as possible

In some way or another, your client is an entrepreneur. Whether the client is a small business, or large enterprise, it’s usually run by an entrepreneur. We all know what the life of an entrepreneur is like- several highs and lows throughout the month, week, or even day. You should always give the client the benefit of the doubt. Maybe there were a pile up of expenses that occurred or unexpected bills that affected cash flows. As long as the client is open and transparent about this, you should always be accommodating in these circumstances.

Tip #2. Grace periods are important

As mentioned above, you should try and give the client the benefit of the doubt. It certainly helps if the client is transparent and informs you of any delay in payment, but if they don’t, you should still provide a generous grace period. Just because they haven’t informed you of any delay or missed payment, it doesn’t mean they won’t pay altogether. They could still be going through some situation that’s affecting cash flow, or an array of other reasons. It’s usually worth waiting a few days to collect the payment. If there’s still no word from the client, and the grace period has passed, then you have every right to pull the plug on their service and close the account.

Tip #3. Be personal and human

Dunning communication is tough. It’s basically a form of collections, which generally has a negative connotation towards it. It’s important to make the communication very human and personal, and should usually be sent from an actual person, usually a manager or CEO. Of course, the style and tone of the messaging is purely dependant on the brand and company. If your company’s branding is very “young, hip and cool”, than your dunning messaging probably shouldn’t sound robotic and canned.

What happens at the end of the dunning period?

Once the dunning period comes to an end, you have a choice.

i) To close and terminate the account, or
ii) Keep the account open and further try and collect payment.

The first option is the most simple and cleanest choice. After the last dunning message goes out, and there is still no response from the client, you simply close their account and move on. No time or resources are required, and you simply focus your attention on getting new customers and servicing existing ones.

From my experience, the second option could be very effective. Sometimes the client simply didn’t receive the dunning messages. Maybe they changed their email, their email server went down, or messages were going into spam. More often than not, a simple phone call could save the client from churning.

In other cases, the client was thinking about cancelling, got the dunning emails, and is simply letting their account expire. In these situations, a simple phone call will inform you of this, and give you the opportunity to retain the client. Sometimes, a quick conversation reminding the client about the value of your service is all it takes to retain their business and collect payment.

The second option is definitely more time-consuming and resource-draining. However, depending on the nature of your business, type of customers and available resources, it could be worthwhile exploring.

Depending on the size of the business, a good dunning strategy can retrieve tens or even hundreds of thousands of dollars per month or more, automatically. The amount retrieved in dunning is usually a fair percentage of a company’s revenue (5-10%). It’s easy for companies to overlook the importance of dunning when it’s on autopilot, but never underestimate how impactful it is to the bottom line!