What Is Dunning? The Complete Guide for SaaS Founders

Every month, SaaS companies lose between 5% and 15% of their recurring revenue to failed payments. The customer didn't cancel. They didn't churn on purpose. Their credit card expired, their bank flagged the charge, or they simply ran out of funds. And if you don't have a dunning process in place, that revenue disappears without a fight.

Dunning is the mechanism that stands between a failed payment and a lost customer. It's how subscription businesses systematically recover revenue that would otherwise slip through the cracks. Yet most SaaS founders either don't know what dunning is, or rely on Stripe's default settings and hope for the best.

When building MRRSaver, we discovered that most SaaS tools treat dunning as an afterthought. This guide covers everything you need to know: what dunning means, how the dunning process works step by step, and how to set up a system that recovers failed payments automatically.

What Is Dunning? Definition and Meaning

Dunning is the systematic process of communicating with customers to collect overdue or failed payments. The term comes from the 17th-century English word "dun," meaning to make persistent demands for payment. In modern SaaS, the dunning definition has evolved to encompass the entire workflow of detecting payment failures, retrying charges, notifying customers, and recovering revenue.

So what does dunning mean in practice? When a customer's payment fails, a dunning system kicks in automatically. It retries the charge at optimal intervals, sends the customer emails or SMS messages explaining the issue, and provides a way for them to update their payment information. The goal is simple: recover the revenue before the subscription lapses.

A dunning notice is the message sent to a customer informing them that their payment has failed and action is needed. This can take the form of an email, an SMS, an in-app notification, or even a physical letter in traditional billing contexts. In SaaS, dunning notices are almost always digital and automated.

The meaning of dunning goes beyond just sending reminders. A well-designed dunning system handles the entire recovery lifecycle: from the moment a charge is declined to the moment the customer either updates their card or the subscription is canceled. It's one of the most important revenue protection mechanisms a SaaS business can implement.

Why the Dunning Process Matters for SaaS

Failed payments are the leading cause of involuntary churn in SaaS. Unlike voluntary churn, where a customer deliberately cancels, involuntary churn happens when a payment fails and no one follows up. The customer didn't decide to leave. They just... fell through the cracks.

The numbers are stark. Failed payments account for up to 40% of total SaaS churn. At any given time, one in three of your customers' credit cards is approaching expiration. And for every dollar in actual fraud, banks falsely decline $25 in legitimate transactions. Without a dunning process, you're bleeding revenue from all directions.

Here's why dunning billing is critical for your SaaS:

• Revenue protection. A good dunning system recovers 30-70% of failed payments. On a $50K MRR business losing 5% monthly to payment failures, that's $750 to $1,750 saved every single month.
• Customer retention. Customers who churn involuntarily often don't even realize their subscription lapsed. Dunning payments recovery keeps them active and engaged.
• Reduced support burden. Without dunning, your support team handles payment issues manually. Automated dunning eliminates this entirely.
• Healthier unit economics. Every recovered payment extends customer lifetime value without any acquisition cost. It's the highest-ROI activity in your retention stack.

Dunning churn is entirely preventable. That's what makes it so frustrating when SaaS founders ignore it. You're not losing customers because your product is bad. You're losing them because a credit card expired and nobody followed up.

How the Dunning Procedure Works: Step by Step

The dunning procedure follows a structured workflow from the moment a payment fails to either successful recovery or subscription cancellation. Understanding each step helps you design a system that maximizes recovery rates. Here's how a typical dunning cycle works:

Step 1: Payment Failure Detection

The dunning process begins when a scheduled payment fails. This happens for several reasons: the card has expired, the bank declined the charge due to insufficient funds, the card network flagged the transaction as suspicious, or there was a temporary network error. Your payment processor (like Stripe) returns a decline code that tells you why the charge failed. This information is critical because different failure types require different retry strategies.

Step 2: Smart Payment Retries

Before reaching out to the customer, the system should automatically retry the payment. Smart retries analyze the decline code and retry at the optimal time. For example, an "insufficient funds" decline might succeed a few days later (after payday), while an "expired card" decline will never succeed without customer action. The best dunning systems use machine learning to determine the ideal retry timing, frequency, and number of attempts.

Step 3: Customer Notification

If the retry fails, the customer needs to know. This is where dunning subscription emails come in. The first notification should be friendly and helpful: "We couldn't process your payment. Here's how to fix it." Include a direct link to a payment update page where the customer can enter new card details in seconds. The best dunning emails have a 47% open rate when they're clear, branded, and non-threatening.

Step 4: Escalation Sequence

If the customer doesn't respond to the first email, the dunning cycle escalates. Most effective dunning sequences include 3-5 messages over a 14-21 day window. Each message becomes slightly more urgent. Data from analyzing over 1 million dunning emails shows that open rates and recovery rates drop significantly after the third email, so keep your sequence focused. Some systems also add SMS notifications or in-app banners for higher visibility.

Step 5: Grace Period and Final Notice

Before canceling the subscription, most dunning systems include a grace period. During this window, the customer retains access to the product but receives a final warning. This is your last chance to recover the payment. The final dunning notice should clearly state what happens next: "Your subscription will be canceled on [date] unless you update your payment method."

Step 6: Resolution or Cancellation

The dunning procedure ends in one of two ways. Either the customer updates their payment method and the charge succeeds, or the grace period expires and the subscription is canceled. In both cases, the system should log the outcome for analytics. Tracking recovery rates, time-to-recovery, and failure reasons helps you optimize the process over time.

Common Causes of Payment Failures That Trigger Dunning

Understanding why payments fail helps you design a smarter dunning process. Not all failures are equal, and the recovery strategy should differ based on the root cause. Here are the most common triggers for dunning payments in SaaS:

• Expired credit cards. At any given time, roughly one in three of your customers' cards is approaching its expiration date. This is the most common and most preventable cause of payment failure. Pre-dunning emails sent 30 days before expiration can proactively resolve this.
• Insufficient funds. The customer's bank account doesn't have enough money to cover the charge. These failures are often temporary and resolve themselves within days, making smart retries highly effective.
• Bank fraud detection. About 6.7% of card transactions are blocked by fraud detection software that incorrectly flags them as suspicious. For every $1 in actual fraud, $25 in legitimate payments are falsely declined.
• Card network errors. Temporary issues with the payment processor, the card network, or the issuing bank. These are transient failures that typically resolve on the next retry attempt.
• Lost or stolen cards. When a customer reports a card as lost or stolen, the issuing bank cancels it immediately. No amount of retrying will fix this. The customer must provide a new payment method.
• Spending limits. Corporate cards and some personal cards have daily or monthly spending limits. Once exceeded, all transactions are declined until the limit resets.

A well-configured dunning system treats each failure type differently. Soft declines (insufficient funds, network errors) should trigger automatic retries. Hard declines (expired cards, stolen cards) should immediately notify the customer to update their payment method.

Dunning vs. Debt Collection: What's the Difference?

People often confuse dunning with debt collection, but they serve different purposes and operate at different stages of the payment recovery lifecycle.

Dunning is the early-stage, communication-focused process of reminding customers about failed or overdue payments. It's friendly, automated, and designed to preserve the customer relationship. The dunning process assumes the customer wants to keep their subscription and just needs to fix a payment issue.

Debt collection is the broader, more aggressive process that kicks in when dunning has failed. It may involve negotiation, payment plans, credit holds, external collection agencies, or even legal action. In SaaS, debt collection is rarely necessary because subscription amounts are typically small enough that it's more cost-effective to cancel the subscription than pursue collections.

For SaaS businesses, dunning is what matters. It happens first, it's automated, and it recovers the vast majority of at-risk revenue. If your dunning process is effective, you'll almost never need to think about collections.

How to Set Up an Effective Dunning System

Building a dunning system that maximizes recovery requires more than flipping a switch. Here's how to design a dunning process that actually works for your SaaS business.

Configure Smart Retries

Don't just retry the same charge repeatedly. Use decline-code-aware retry logic that adjusts timing based on the failure reason. Stripe's Smart Retries offer a starting point with up to 8 attempts over 2 weeks, but dedicated dunning tools can retry more intelligently and over longer windows. The goal is to retry soft declines (insufficient funds, network errors) while immediately flagging hard declines (expired card, stolen card) for customer action.

Design Your Email Sequence

A proven dunning email sequence includes 3 to 5 messages spread over 14 to 21 days. Keep the tone friendly and helpful. Your customer didn't fail to pay on purpose. Lead with empathy, make the fix easy, and include a prominent call-to-action button that links directly to a payment update page. Avoid generic subject lines like "Payment Failed." Instead, try something specific: "Your [Product] subscription needs attention."

Add Multiple Communication Channels

Email alone isn't enough. Adding SMS notifications can boost recovery rates by up to 40% compared to email-only sequences. In-app banners catch customers while they're actively using your product. The most effective dunning systems use a combination of email, SMS, and in-app notifications to maximize the chance of reaching the customer.

Create a Frictionless Payment Update Page

Every dunning notification should link to a simple, branded page where the customer can update their card in seconds. Don't force them to log in, navigate to settings, and find their billing page. The fewer clicks between the email and the payment update, the higher your recovery rate. Some dunning tools provide hosted payment update pages that handle this for you.

Implement Pre-Dunning Notifications

The best dunning strategy is preventing failures in the first place. Pre-dunning emails sent 30 days before a card expires achieve a 47% open rate and a 14% recovery rate. That's revenue saved before a single payment even fails. This proactive approach is one of the most underutilized tactics in the dunning process.

Stripe's Built-In Dunning: What It Does and Where It Falls Short

If you're using Stripe for subscription billing, you already have basic dunning capabilities. Stripe offers Smart Retries (machine-learning-based retry logic), configurable email templates for failed payments, and the ability to set subscription behavior after a certain number of failed attempts. It's a reasonable starting point.

But Stripe's dunning has real limitations that cost SaaS businesses revenue:

• Limited retries. Custom retry policies allow a maximum of 3 retries. Smart Retries use ML but max out at about 8 attempts over 2 weeks.
• No SMS support. Stripe only sends email notifications. No SMS, no in-app messages, no webhooks to your own notification system.
• Basic email templates. Stripe's email customization is limited. You can edit the content, but the design options are minimal and the templates often look generic.
• No hard-decline retries. Stripe's Smart Retries skip hard declines entirely. Dedicated dunning tools can still attempt to recover some of these through customer outreach.
• Limited analytics. Stripe provides basic recovery data, but lacks detailed analytics on email open rates, click-through rates, or recovery rates by decline code.

For early-stage SaaS with low MRR, Stripe's built-in dunning may be sufficient. But as your revenue grows, the gap between what Stripe recovers and what a dedicated dunning system recovers widens. At MRRSaver, we've seen SaaS businesses recover significantly more revenue by layering a dedicated dunning solution on top of Stripe.

Dunning Best Practices for SaaS Companies

After working with SaaS founders on payment recovery, we've identified the practices that consistently lead to higher recovery rates. Follow these to get the most out of your dunning system:

1. Start before the failure happens. Send pre-dunning emails when a card is about to expire. This single tactic can prevent a significant chunk of payment failures entirely.
2. Keep your tone friendly and human. Failed payments are stressful for customers. Don't make them feel guilty. Approach the conversation as "here's how to fix this" rather than "you owe us money."
3. Make the fix one click away. Every dunning email should include a prominent button that takes the customer directly to a payment update page. No login required. No navigation needed.
4. Use multiple channels. Don't rely on email alone. Adding SMS can improve recovery rates by up to 40%. In-app notifications catch active users. Use every channel available.
5. Differentiate by decline code. An expired card needs a different message than insufficient funds. Personalize your dunning notifications based on the failure reason.
6. Set a reasonable grace period. Give customers 14-21 days to resolve payment issues before canceling their subscription. Shorter windows leave money on the table. Longer windows can lead to abuse.
7. Track and optimize. Monitor your recovery rate, time-to-recovery, and revenue saved. A/B test email subject lines, timing, and messaging to continuously improve.
8. Automate everything. Manual dunning doesn't scale. As your customer base grows, the number of failed payments grows proportionally. Automate your dunning process from day one.

Stop Losing Revenue to Failed Payments

The dunning process isn't glamorous, but it's one of the highest-ROI activities you can invest in as a SaaS founder. Every failed payment you recover is pure retained revenue with zero acquisition cost. And with the right dunning system in place, recovery happens automatically while you focus on building your product.

Whether you start with Stripe's built-in retries or invest in a dedicated tool, the key is to not leave failed payments unaddressed. Define your dunning process, set it to run on autopilot, and watch your involuntary churn drop.

Ready to stop losing MRR to failed payments? MRRSaver automates your entire dunning process. Connect Stripe in one click and start recovering revenue today.