Did you know that in 42% of cases associated with payment failure, the primary reason is insufficient funds? Following closely are issues like expired credit cards and changes in payment details. All these factors can lead to failed payments.

Since many of these issues are fixable with proper processes and communication, it's crucial to understand the distinction between payment reminders, dunning and debt collection. Payment reminders are generally less aggressive in nature, ideal for situations where the problem may be easily resolved, such as updating payment information. Dunning and debt collection on the other hand, are more forceful and should be reserved for cases where initial attempts at resolution have failed.

For subscription-based business models, having a clear understanding of when to apply payment retrial versus dunning and debt collection is essential. It ensures that there are no misunderstandings or inconsistencies in communication, maintaining a positive customer relationship while effectively managing revenue collection.

In this article:

• What is payment retrial?
• What is dunning?
• What is debt collection?
• Key areas of difference between payment retrial and dunning / debt collection.
• Best practices for setting up payment retrial and dunning / debt collection process. 

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What is payment retrial?

Payment retrial: The initial phase of payment recovery. 

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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What is dunning? 

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.

There may or may not be fees associated with this process depending on the country of operation. In Germany, for example, legally permissible for the creditor to include dunning fees (“Mahngebühren”). These fees compensate the creditor for the costs associated with sending the dunning notices. However, these fees must be reasonable and proportionate to the actual costs incurred by the creditor.

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For physical product subscriptions, dunning typically includes:

1. Reminder Notices: Sending polite reminder letters or emails to customers who have missed a payment. These notices highlight the overdue amount and request immediate payment, often before the next shipment of products (in case of consumable subscriptions) or for continued, uninterrupted use of product (in case of physical product subscriptions). 

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2. Phone Calls: If written reminders are ignored, businesses may follow up with phone calls to discuss the overdue payment directly, reinforcing the importance of timely payment for continued service.
   
   
3. Escalation Notices: As the overdue period extends, the tone of communications may become firmer, warning customers of potential service interruptions or additional fees if the debt remains unpaid.

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What is debt collection? 

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 physical product subscriptions, debt collection involves more formal and often external methods:

1. Third-Party Agencies: Businesses may hire debt collection agencies specialising in recovering unpaid debts. These agencies handle the recovery process, allowing the business to focus on operations.
2. Legal Action: Debt collectors may initiate legal proceedings to recover the debt. This can involve filing lawsuits, obtaining court judgments, and potentially repossessing the subscribed products, such as machinery or vehicles.
3. Negotiation and Settlement: Debt collection agencies may negotiate with debtors to settle the debt for a reduced amount if full payment seems unlikely. For example, a furniture subscription service might agree to a lower settlement amount to avoid prolonged legal action.

Debt collection is often more aggressive and can strain the relationship between the business and the customer. In subscription businesses, this might mean the repossession of rented items or the cessation of service for consumable products.

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Key areas of difference between payment retrial and dunning / debt collection.

Key Differences

1. Nature of Interaction: Payment retrial is typically an internal, friendly reminder process, while dunning / debt collection involves external agencies and can be more forceful.
2. Formality and Legal Involvement: Payment retrial and the notification associated with it is usually non-legal, focusing on reminders and negotiations, whereas dunning / debt collection may involve legal actions to recover debts.
3. Relationship Impact: Payment retrial aims to preserve the customer relationship, crucial for subscription models, while dunning / debt collection may damage it due to its aggressive nature.

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Best practices for setting up payment retrial and dunning / debt collection process. 

For subscription-based business models, effective management of payment failures and debt recovery is crucial for maintaining steady cash flow and fostering positive customer relationships. Understanding when to use payment retrial versus debt collection is a key component of this management. Here are best practices for setting up these processes to ensure clarity, efficiency, and effectiveness:

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1. Aways start with payment retrial 

Before moving to more aggressive debt collection methods, begin with payment retrial. This approach provides an opportunity for customers to rectify issues without feeling pressured.

Payment retrial: The first step in payment recovery, where we automatically attempt 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. Retry the payment more than once

When a payment fails, don’t settle for a single attempt. By retrying the payment multiple times, you increase the chances of successful processing. This approach accounts for temporary issues such as insufficient funds or technical glitches, giving the payment a better chance of going through. Multiple retries ensure you’re doing everything possible to recover the funds before considering other recovery steps.

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3. Retry the payment as soon as it fails

In order to overcome the issue of payment failure due to any technical error, retry the payment as soon as it fails.

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4. Send more than one reminder

Sending multiple reminders is crucial in the payment recovery process. Often, a single reminder may not capture the customer’s attention or prompt immediate action. To improve the chances of resolving the payment issue:

• Initial Reminder: The first reminder should be sent soon after the payment failure, politely notifying the customer of the issue.
• Follow-Up Reminders: Send subsequent reminders at regular intervals if the payment remains unresolved. Each reminder should escalate in urgency but remain respectful and understanding.

Multiple reminders ensure that the customer is consistently informed and reminded of their obligation, increasing the likelihood of payment resolution.

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Recommendation: The general recommendation around how many reminders should be sent is 3-4 reminders with the last reminder labeled as “Final Reminder”. 

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5. Always Set a Gap Between Two Reminders and attempts‍

Spacing out reminders and attempts is important to avoid overwhelming the customer and to give them adequate time to address the payment issue:

• Appropriate Intervals: Set intervals of several days to a week between payment attempts and reminders, depending on your payment cycle and the severity of the delinquency.
• Balanced Approach: Ensure the gaps are long enough to avoid appearing too aggressive but short enough to keep the issue top-of-mind for the customer.

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Recommendation: The first reminder should be sent the same day as the payment fails. The subsequent reminders can be sent anywhere with the gap of 3-6 days.

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6. Include Information About Payment Failure Reason‍

When communicating with customers about failed payments, always include information about the specific reason for the failure:

• Clear Explanation: Provide a clear and concise explanation of why the payment failed, such as insufficient funds, expired credit cards, or incorrect payment details.
• Resolution Steps: Offer specific steps the customer can take to resolve the issue. For example, if the card has expired, instruct them on how to update their payment information.

Including the reason for the payment failure helps the customer understand the problem and take appropriate action to fix it, reducing confusion and enhancing the effectiveness of your reminders.

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7. Transition to Debt Collection When Necessary‍

If payment retrial efforts fail, it’s time to consider debt collection. Ensure this transition is handled appropriately:

• ‍Clear Thresholds: Define clear thresholds for when to move from payment retrial to debt collection. This could be based on the number of missed payments, the duration of the overdue period, or the total amount owed.
• Automate and Streamline Processes: Utilise technology to automate and streamline both dunning and debt collection. Employ software solutions that automate reminders, payment retries, and data tracking. This reduces manual effort and minimises errors.

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In conclusion, while both payment retrials and dunning / debt collection are integral to managing unpaid debts in subscription businesses, they represent different stages and methods of recovery. Employing a strategic payment retrial process initially can help maintain positive customer relationships and ensure financial stability. Debt collection should be a last resort, used only when all other efforts have failed. Understanding these differences helps subscription businesses effectively manage receivables and sustain long-term customer loyalty.