If you’ve ever had an overdue payment before, you’ve seen a dunning letter.

The term “dunning letter” is accounting jargon for a piece of writing you receive from a business that you’ve used services from, but haven’t paid for yet. Sometimes they’re included on the invoice in message form.

Either way, you’ve waited so long to pay for these services that you’re now considered a delinquent by the business because your balance with them is overdue.

The last part of that explanation is what separates this type of correspondence from other payment-related letters. You’ve put off paying for so long that the business you purchased goods and/or services from has no choice but to send you another notification that you still owe them money.

Being on the receiving end of a dunning letter isn’t something to look forward to.

Maybe you’ve waited to pay off your outstanding balance because you’re still saving up to try and afford what you purchased. Or maybe you’re in charge of a business that’s waiting to collect your outstanding balances before paying off the debts you owe. Regardless of which side of the coin you’re on, receiving this type of message is kind of annoying.

They’re an essential piece in any well-oiled collection process. Yet, not every organization understands that fact. Even if you do, that doesn’t mean you’re writing and sending out effective ones.

Why Dunning Letters are Important

Businesses have to stay on top of and in communication with their accounts that haven’t paid them yet or risk closing their doors for good. It’s that simple.

Let’s say that you’re a business owner who charges your clients in the form of invoices. That’s nothing new, it’s a safe and common form of collecting payment.

Regardless of which medium you use to send your invoice, your client will pay you back the moment they receive it, right?

Although that sounds nice and should be how the world operates, it’s not. Your clients might not pay you right away for a variety of reasons including…

They haven’t received what they purchased yet
Their accounting cycle hasn’t arrived yet
Your payment options aren’t convenient
They never received the invoice (maybe you sent it to the wrong address)
They could never afford your services in the first place

I hinted at some of those listed reasons in the introduction. The point I’m trying to make is that it takes a surprisingly long amount of time to collect from people that you’ve sold to. There is a metric to define that amount of time and it’s called Days Sales Outstanding (DSO).

The average DSO across the globe was 66 days and it’s expected to increase by another 2 days in 2021. That’s the highest level this metric has reached in the past decade.

In other words, sending dunning letters is an inevitable process that you’ll have to implement within your organization in an attempt to decrease your DSO.

After reading all of that you’re probably wondering two things…

When do I send these letters?
Does sending dunning letters work?

When Should I Send These Letters?

A dunning letter shouldn’t act as the first correspondence you’ve sent to your clients who have outstanding balances. By this time in their financial journey, they should’ve received multiple payment reminders about their account status as it aged.

After all, sending reminders regarding their balance with you before their due date lowers their chances of delinquency by 33%. But that still leaves a 66% chance that your clients won’t pay you on time.

Dunning letters go out in stages, based on how many days have passed since the due date…

1 net day
30 net days
60 net days
90 net days
120 net day

Although the process could go on for half a year, it doesn’t always have to. Further, there is room to experiment with how many days in between you wait to send subsequent letters.

At a certain point, the costs of the labor and time put into trying to collect from an overdue account equals the amount of the outstanding balance itself.

When that happens most organizations will give up on the process internally and send the delinquent to a collections agency.

Does Sending Dunning Letters Work?

The short answer to that question is yes. If this arduous process didn’t work, I wouldn’t write a blog post about it. I’m being facetious.

According to baremetrics, the recovery rate for dunning emails decreases by almost 10% by the sixth attempt.

Baremetrics’ chart above and the rates within it are a little bit different than what I’ve mentioned so far because it’s specific to email (more on that later). The biggest takeaway from this chart is that the “older” the outdated account balance, the less likely the chance of recovery.

Yet, I bet the recovery rate for each dunning email that baremetrics sent out was much higher than you imagined. Not to mention it was above 10% for the first three messages that they sent.

That’s worth the effort, if they hadn’t sent those messages at all they would lose out on a recovery rate of almost 50% from outdated balances. That’s a ton of money they were able to bring in.

How to Write a Dunning Message

Sending a dunning letter isn’t overly difficult. The hardest part about it is coming up with effective verbiage that not only tells the recipients why you’re sending them a letter but also prompts action.

At this point, you’ve already spent a lot of time and money trying to collect on your overdue balances. In other words, you want to make sure that whatever you send them in these last-ditch attempts to prompt payment works.

Format and Medium

Before you’ve started to even think about what you’re going to include in your dunning letters, you need to figure out the right medium.

I hinted at the importance of how you choose to send this type of account notification to your clients in the previous section when I referenced Baremetrics’ study. Email is a popular medium to use, but they have an average click rate of 2.45%.

That’s low. Yet, the percentages given in the chart from the previous section are much higher. How is that possible?

The success of dunning letter emails you send depends on a mixture of what you include in your message and the demographic of the individuals you’re sending to. Different generations prefer different means of communication, which is a problem healthcare organizations are trying to tackle.

For example, if the majority of your clients are a part of the Baby Boomer generation, it’s helpful to know that they prefer face-to-face and/or voice communication. Maybe boost your collections is only one phone call away.

Choose the most effective mediums for who you’re sending your messages to and use them all at once.

Styling

Now that you’ve picked a few mediums through which you’ll send your dunning letters, it’s still not time to start thinking about what you’ll include within it.

Instead, you need to figure out what it’s going to look like. Regardless of which type of communication you choose, it has to catch the attention of your recipients.

The fact of the matter is that we’re all flooded with business communications daily. We drive to work in the morning and see billboards scattered across the highway, hear radio hosts recommend that we purchase something during their shows, and receive push notifications that block our screens while trying to navigate.

It’s estimated that we see between 6,000 to 10,000 every day. Your delinquent accounts aren’t immune to that statistic.

The point I’m trying to make is that the dunning letters you send aren’t that much different from advertisements. Of course, the purpose of an advertisement is to entice someone into purchasing a product. For a dunning letter, someone has already purchased something but hasn’t paid.

Yet, sending clients a letter asking them to pay in a stack of junk mail (whether via email or physically) could get lost.

In other words, you have to ensure that the way you style your correspondence to delinquent accounts stands out.

Tone

Even though it’s frustrating to continue to pursue collecting on your outstanding balances, that doesn’t mean that it should bleed into the content that they send you.

Commanding that your clients with overdue balances pay you as soon as possible isn’t going to work. Doing so will only make you come off like a 1920s loan shark or gangster (arguably less effective).

Coming off as threatening when asking for payment didn’t work for the mobster “Snakes” in the classic film, Angels With Filthy Souls. It’s more famously known as the black and white movie that Kevin Mcallister watches in Homealone when he’s first finding out that he may have the house to himself.

So what tone should you use?

The best practice is to change the tone over time. The first series of letters that you send should focus on cooperation and use polite language. If the account continues to age while it’s overdue, the tone should shift toward one that’s more straightforward.

The reality is that when an account reaches 120 days overdue, you’re most likely headed toward not pursuing further business with that customer. Thus, those last few letters will most likely only contain information about the account, amount due and original due date.

Irrespective of the tone, dunning letters should always include…

Amount due
Date of the unpaid invoice
Invoice number/Account identification number
Late fees and/or interest penalties.

Conclusion

Dunning letters are an essential part of every business’s collection process. It would be great if your clients paid you the moment you sent them your invoice, but it’s not that easy in the real world.

Sending this type of correspondence isn’t the hard part, it’s prompting action that makes the process difficult. All of the factors that I discussed in this ultimate guide help you collect from your delinquent accounts so that you can close outstanding balances while not losing money on time and effort.