If you are a product or consumable subscription business experiencing an increasing amount of payment failure and want to implement ways to either prevent failed payments or recover unpaid invoices, this article is for you. 

Industry studies suggest that payment failure rates for recurring payments can range from 5% to 15%, depending on the industry and customer base. Effective dunning strategies can recover 30% to 50% of failed payments.

In this article:

• What are failed payments
• Most common reasons for failed payments
• The most important step to prevent failed payments 
• The second most important step to prevent failed payments
• All the other ways to prevent failed payments
• Payment retrial, dunning & debt collection with circuly

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What are failed payments?

Failed payments occur when a customer's payment for a subscription service cannot be processed successfully. This can happen for various reasons, and it directly impacts the revenue of subscription businesses. Understanding and addressing the root causes of failed payments is essential for maintaining a healthy cash flow and customer base.

Most common reasons for failed payments

• Expired Cards: A primary cause of subscription payment failures is customers using expired credit or debit cards.
• Insufficient Funds: Customers may not have enough funds in their accounts to cover the subscription cost.
• Technical Issues: Problems with payment gateways or processing networks can lead to transaction failures.
• Fraud Prevention: Legitimate transactions may be flagged as fraudulent by the bank or payment processor, resulting in a decline.
• Incorrect Payment Details: Errors in the provided card information, such as wrong card number, CVV, or billing address, can cause a failed payment.
• Fraudulent customers: Customers may have ill intensions and may themselves default on subscription payments. 

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The most important step to prevent failed payments 

The most important step that you can take as a business to prevent failed payments is to implement a credit check solution for your product or consumable subscription business. 

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What is credit check and how does it work?

E-commerce businesses use credit checks to evaluate the creditworthiness of their customers and mitigate risks associated with non-payment and fraud. By incorporating credit checks, e-commerce businesses can better manage financial risks, prevent fraud, and offer tailored services that enhance customer satisfaction and loyalty. 

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Are credit checks common for all subscription businesses?

• ‍SaaS and Digital Subscriptions: These businesses generally do not perform credit checks at the point of sign-up due to the lower risk associated with digital product subscriptions and the ease of cancelling the service if payments fail. Instead, these companies often rely on automated payment retries and dunning processes to manage payment failures.‍
• Retail Subscription Boxes: Subscription box services for products like beauty, food, or clothing rarely perform credit checks, focusing instead on ease of sign-up to attract more customers. They typically handle payment failures through email reminders and payment retrials.

In the case of subscription boxes, companies can easily suspend deliveries if repeated payment failures occur.

• ‍Product Subscription Businesses - For product subscription businesses involving high-value items, implementing credit checks is a prudent measure. Since the financial risk is significant if a customer defaults on payments while retaining the product, conducting credit checks before accepting new customers can help mitigate the risk of non-payment and fraud. This proactive approach ensures that only creditworthy customers are approved, safeguarding the business from potential financial losses.

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Subscription companies that perform credit check

Here are some examples of product subscription companies that perform credit checks. 

Grover

Apple

Care by Volvo

Porsche Drive

Peleton  

The second most important step to prevent failed payments

The second most important step to prevent failed payments is to notify the customers about upcoming payments. This proactive approach helps ensure that customers are aware of their financial commitments and can take necessary actions to avoid payment issues.

Why Reminders are Crucial

• ‍Consumer Behaviour: An average consumer has anywhere between 3 to 12 paid subscriptions. With so many subscriptions, it's natural for consumers to occasionally forget about some of them. This can lead to unexpected charges, insufficient funds, and ultimately, failed payments.‍
• Financial Planning: By reminding customers of upcoming payments, businesses help them plan their finances better. This reduces the likelihood of insufficient funds and ensures that customers are prepared for the transaction.‍
• Customer Satisfaction: Unexpected charges can lead to frustration and dissatisfaction. Payment reminders improve transparency and build trust, leading to higher customer satisfaction and loyalty.

Best Practices for Payment Reminders

• ‍Timing: Send reminders a few days before the payment is due. This gives customers enough time to ensure their account has sufficient funds or to update their payment details if necessary.‍
• Multiple Channels: Use various communication channels such as email, SMS, and app notifications to ensure the reminder reaches the customer. Some customers may respond better to one channel over another.‍
• Clear Messaging: Ensure that the reminder message is clear and concise. Include important details such as the amount due, due date, and instructions for updating payment information if needed.‍
• Personalisation: Personalise the reminder with the customer’s name and specific subscription details. Personalised messages are more likely to be noticed and acted upon.

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All the other ways to prevent failed payments

Even after performing credit checks and reminding the customers about upcoming payments, cases of failed payments may still arise. Here's how you can set up a process for recovering failed payments and unpaid invoices.

1. Using payment retrial for payment recovery

Payment retrial is the first step in payment recovery, where an automatic attempt is made to process the payment again after an initial failure. This phase helps address temporary issues like insufficient funds or expired cards before moving on to more intensive recovery measures.

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2. Using dunning for payment recovery

Dunning: The Second Phase of Debt Recovery

Dunning is the process of regularly reminding customers to pay their overdue bills. This involves sending reminder letters, emails, or making phone calls. The aim is to get the customer to pay what they owe without needing to take legal action. The process usually starts with polite reminders and becomes more assertive if the payment is still not made.

When a payment fails, start with payment recovery via payment retrial and then move to dunning /debt collection. 

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Here’s how you should ideally set up any dunning process

• Retry logic: automatically retrying the subscription payment as soon as the payment fails.  
• Notification: inform the customer that a payment retrial attempt was made because their was an issue with the first payment attempt. This may already give the customer an indication that their is an issue with their payment method. 
• Information: If possible, state the exact reason why the payment failed in the communication you send to the customer and also inform them whether the issue is at their end or at your end. This helps to set the expectations straight. 
• Update services: Send a payment update link to the customer of the issue continues to persist. 

Effective retrial can recover a significant portion of failed payments, ensuring a more stable revenue stream and without damaging the customer relationship. 

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Using debt collection for payment recovery 

Debt Collection: The Advanced Stage of Debt Recovery

Debt collection is the process of recovering overdue debts when initial reminders have failed. It can be handled internally or by a third-party agency. Debt collection often involves more aggressive tactics, including legal action. Collectors may negotiate payment plans, settle for a reduced amount, or take legal steps to garnish wages or place liens on property.

For payments that remain unresolved after dunning efforts, traditional debt collection methods may be employed. This involves:

• Third-Party Collection Agencies: Engaging professional debt collectors to recover outstanding payments.
• Legal Action: In extreme cases, pursuing legal action to recover owed amounts. Debt collection should be a last resort due to its potential impact on customer relationships and additional costs.

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When to use payment retrial vs dunning / debt collection for payment recovery 

Payment retrial: Should be the first line of defence, as it is less invasive and maintains a positive customer relationship. Use payment retrial for recent and minor payment failures.

Debt Collection: Should be used when dunning efforts have been exhausted and payments remain outstanding for an extended period. Ideal for significant amounts and long-term delinquencies.

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Learn more about the difference between payment retrial and dunning / debt collection for product subscription businesses. 

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Importance of automation for payment retrial and debt collection / dunning

Automation in payment recovery can streamline the recovery process, reduce costs, and improve efficiency. No one wants to write the same email over and over again, let alone do it indefinitely. Sending reminders, notices, and performing retry attempts are tasks that should be automated. 

Imagine having a tireless, polite, yet persistent robot on your team, tirelessly handling routine follow-ups, sending reminders, and tracking payment statuses without so much as a coffee break. 

By implementing these strategies, subscription businesses can significantly reduce the incidence of payment failures and improve their recovery rates, ensuring a healthier cash flow and better customer retention. 

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Dunning and debt collection with circuly 

Circuly is a subscription management software solution that enables you to launch a subscription based business model for physical products and manage and scale all subscription operations related with such a business model such as recurring billing, recurring invoicing, asset tracking, product return handling, transactional communication etc. 

Dunning for subscription businesses in circuly - as part of the recurring billing and payment operations, circuly offers in-built dunning and partner-enabled debt collection. 

In circuly you can set up your own custom payment retrial process and define the number of payment retrial attempts you wish to do for a failed payment, the frequency of each attempt, whether or not you wish to inform the customer about the attempts and what happens if a payment continues to fail. 

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Unlike the payment retrial offered by payment solutions, circuly does not restrict the number of retrial payment mandates and gives you full control and flexibility over the payment mandate. 

Debt collection for subscription businesses in circuly - circuly parters with Debtist to offer a native debt collection and dunning integration natively within circuly. 

As soon as the payment retrial process is complete, and the subscription payment is still open, the payment will be handed over to our debt collection partner. The circuly - Debtist integration ensures that you have full and detailed overview of your unpaid payments within circuly and you are not required to operate in two different systems. The two systems speak with each other seamlessly to provide you a smooth and consistent user experience. 

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