When (and How) to Optimize How You Handle Failed Payments

When (and How) to Optimize How You Handle Failed Payments

I first met Matt Goldman – serial entrepreneur & CEO of Churn Buster – 3 years ago in San Diego just after selling Clarity.fm.

I was invited to speak at the local co-working space and Matt saw that I was in town, so he asked me to come on his Rocketship.fm podcast. It was a super fun conversation and I realized this guy was talented.

Fast forward a few years and Matt sold his previous company, bought Churn Buster and it’s been a rocket ship (pun intended) ever since.

Over the past few months, I’ve been emailing with Matt about doing a post on how to reduce churn as I know it’s a not-so-sexy topic that’s critical when it comes to scaling a B2B SaaS company and he’s an expert.

This is what he came up with – it’s awesome!… be sure to read #5 “Leaving Money on The Table” and post any questions in the comments below.

So with that, enter Matt.

When you’re grinding your way to $25k MRR, you can afford to focus on customer-growth and ignore churn for a while.

However, once you cross that threshold, it’s worth taking another look to ensure you have a solid foundation in place.

With 40-50% of subscriber churn being caused by failed credit card payments, passive churn is a  great area of focus as you lay your foundation for more efficient growth on the journey to $1M ARR and beyond.

At Churn Buster, we’ve seen the good, the bad, and the ugly when it comes to recovering customers who’ve experienced a failed payment.

The root of the problem is that most founders underestimate and oversimplify failed payment handling.

Let’s start with “the ugly,” then we’ll touch on “the bad,” and we’ll spend the bulk of this post touching on “the good.” You’ll walk away with a good understanding of how to optimize your failed payment handling.


The Ugly (when it comes to handling failed payments)

If you’re collecting payments via credit card for your subscription businesses, it’s not a question of if you’ll experience failures…it’s a matter of how many failures you’ll experience.

It varies between B2C and B2B businesses, but assume you’ll see 7-10% of all the payments you process fail.

Payments fail for a number of reasons besides expirations (which Account Updater has really improved over the years – it’s automatically enabled in your Stripe/Braintree account). Failures can be temporary or permanent, sometimes solvable via retries, and sometimes requiring a new credit card from your customer.

The most important things you need to do are:

  1. Take these failures seriously,
  2. Give your subscribers a solid chance to remain customers,
  3. Don’t treat all failures the same (you don’t always need an updated credit card, so don’t spam customers asking for one.)

When we think about the worst dunning (failed payment handling) setups we’ve seen…these come to mind:

  • Not retrying failed charges automatically, or only retrying once,
  • Canceling subscriptions (rather than leaving as unpaid) too aggressively,
  • Not sending emails to customers when their payment fails.


The Bad

Luckily, most companies we talk with don’t fall into the Ugly category.

Especially when it comes to tech startups with technical teams who are aware of the pain of failed payments.

When they’re getting started, most startups build out a basic dunning system or use a dunning add-on tool as part of a metrics product, like Baremetrics.

This works well as you grow towards $25k MRR but when you expand beyond that, it’s important to have a system in place that plugs the remaining holes in your bucket.

Most in-house systems or dunning add-ons are static, often sending out emails every time a payment fails and limiting the optimizations you can make.

They also don’t give you enough control over what emails look like, who they come from, where they link to, and how human you can make them feel. They often have deliverability issues, and bury high-value opportunities beneath the surface (like when your $500/mo annual account has emails bounce because your point-of-contact left the company).

As you cross over the $25k MRR milestone, keep an eye out for the following red flags of a Bad dunning system (I’ve included a link in each section that goes into more detail about how we handle these problems at Churn Buster – you can reference these to learn more about how to handle these red flags at your own company).

1. Emails Tied to Failed Payments

If your system has a fixed schedule or sends emails automatically in response to failed payments (usually after being notified by a webhook from Stripe, Braintree, etc), you have room for improvement.

We always wait 3-5 days before sending our first email, allowing 2-3 retries to take place (without emails being sent), enabling over 21% of charges to succeed without notifying your customer. That’s 21% fewer emails sent, and 21% fewer customers you’ve bothered!

We believe the emails you send your customers should be about how awesome your product & company are, not about imaginary payment problems that can be easily solved with a retry or two.

This also reduces your support load if you have a high volume of customers. It’s common for customers to reply to these emails telling you it’s a temporary issue, and to retry the card in X days.

Click to learn more about Custom Retry Schedules.

2. Ghost Customers

Specifically when using Stripe, if a customer updates their card after the retries have ended, they’ll have an unpaid subscription in Stripe, and even though they have a good payment method on-file and have shown intent-to-renew, Stripe will never bill them again.

You need to ensure that you catch these card updates, and automatically pay their most recent invoice in order to reactivate the subscription and continue billing them.

Click to learn more about Ghost Customers in Stripe.

3. Not Linking to a Proper Card Capture Page

The worst case we’ve seen is when a company emails their customers notifications, but the emails don’t have links in them.

The next worst case is when the link points to someone else’s domain name, not yours. Customers are already on-alert when they receive emails asking for credit card information and you need to strive to build trust. Links pointing to your domain name, using your SSL certificate, are table-stakes.

Lastly, when someone clicks the link, you should ensure that they don’t need to login to their account in order to update their card. They should click the link, type in the card details, hit submit, and leave.

Why does it need to be that simple? Over 70% of the failed payment notification emails we send are opened on a mobile phone. Make it easy! Retain more customers.

Click to learn more about Card Update Pages for Stripe and Braintree.

4. Sending Robotic (or Suspicious) Emails on Repeat

Many basic dunning systems limit how much you can customize what emails look like and who they’re sent from. Also, they use the same template for all emails. So your customers receive the same email over and over. Often sent from a no-reply address. Not a very warm interaction!

Or worse, emails are sent from addresses like “[email protected]” or “[email protected] via someothercompany.com” raising customer concerns about phishing.

You should make sure each email you send is different, with some coming from real people at your company sent as plaintext (preferably senior CS or C-level teammates), with real email addresses as the senders, with replies routed to your support team.

Click to learn more about Customizing Dunning Emails.

5. Leaving Money on the Table

If you’re using custom campaign schedules (not tied to retry webhooks), then you’re able to extend the length of your campaigns, increasing the odds of recovery. As you do this, it becomes possible that a customer will have several unpaid invoices.

You should ensure that you’re not only automatically collecting the most recent invoice (so that the subscription gets reactivated), but also up to X additional invoices.

Every business is different in how many invoices they like to collect, ranging from just 1, up to ALL OF THEM. What’s important is that you define what you like, and automate collections so that money isn’t left on-the-table.

Click to learn more about Unpaid Invoice Collections.


The Good

The best systems we see are at companies that are processing millions a year in recurring revenue. They know the value of improving anywhere in their business. Especially when it comes to the compounding returns that come from focusing on churn.

Let’s look at an example:

Company bills $5 million a month (let’s assume they only have monthly plans).

7% of those payments fail every month.
That’s $350k MRR at-risk every month.

If they improve their failed payment recovery process by only 1%, that’s an additional $3,500 MRR each month.

Since those MRR returns compound, the impact to cash flow is significant.

6 months later, this example business has $73,500 in cash they wouldn’t have had otherwise.
Formula: $3,500 in month 1 + ($3,500*2) in month 2 + ($3,500*3) in month 3 + etc.

12 months later, they have $273,000 in new cash accumulated.

And that’s all based on a 1% improvement. You can see how it scales…when you’re at-scale.

For businesses at this stage, and those approaching this stage, they need tooling that gives them the flexibility to experiment, and visibility to track performance.

SaaS companies often invest gobs of energy into marketing and sales, and then completely neglect retaining customers who are worth far more.

Here are the things you should be doing at this stage, relative to failed payments:

1. Don’t Treat All Customers Equally

If a customer’s card error is permanent, we know for certain that a retry won’t resolve the problem, so it doesn’t make sense to wait to email the customer. Similarly, if we know a card failed due to insufficient funds, we know we likely don’t need a new card-on-file.

Customers that are worth more than $200/mo, or who are subscribed to annual plans, may deserve manual recovery efforts if automated campaigns are unsuccessful. Similarly, high-volume customers worth less than $50/mo shouldn’t be a distraction for your team.

As you grow, your dunning system should automate the easy recoveries, and escalate the high-value recoveries for your team to come in and save the day.

2. Ensure Your Emails are Reaching the Inbox

There are many reasons why an email sent won’t actually arrive.

Your customer left the company, their inbox is full, your emails are being filtered into a folder, etc.

It’s critical that you monitor for bounces, and opens, and intervene when justified by the value of the account.

Click to learn more about Dunning Email Deliverability.

3. Escalate the Valuable Stuff

When something like a bounce or lack of opens happens, you need a way to escalate campaigns to a team member for review. Or you could even do this on day 20 of 25 for campaigns that are worth more than a certain amount.

Without a programmatic escalation, your team is missing from an interaction where they could have saved the day or plugged a leak in your bucket of customers.

Click to learn more about Failed Payment Notifications and Escalations.

4. Monitor Performance in Cohorts

You should be monitoring recovery over-time, by looking at each week of failed payments and how they were recovered. Were they recovered via retry? Via card update? After how long?

And you should be tracking your recovery rate in the same cohort-based manner.

These metrics allow you to iterate and improve over time, spotting opportunities for modifying campaigns, retry schedules, and more.

Click to learn more about Failed Payment Analytics.


Depending on your current scale, some of these tactics will prove more valuable than others.

What’s important is that you don’t underestimate and oversimplify dunning. It’s one of the greatest headwinds you can impose on your SaaS business as you strive to reach your next growth milestone.

At Churn Buster, we’re the only company fully-focused on this problem. We love going deep and helping scaling companies grow faster than they would with basic dunning tools. If you have questions about the performance of your current setup, you can email us at [email protected]. Or you can switch to Churn Buster by choosing a plan on our pricing page.


Matt Goldman is the CEO of Churn Buster. Matt filed his first tax return when he was 12...just for fun. He’s spent years helping SaaS companies understand their growth & churn, and now he spends his day's busting churn. He also enjoys eggs.

  • https://churnbuster.io Matt Goldman

    Thanks for the kind words, Dan!

    If anyone has any questions, you can hit me here in the comments 👍

    • http://twitter.com/danmartell Dan Martell

      Matt, appreciate the contribution… way to bring the fire!

      DM