Prorated Billing

Prorated billing is a methodology of charging customers based on certain principles only for a partial period of the product or service. In other terms, the billing system recalculates the actual billing amount based on the active period of services whenever a change in the plan takes place, meaning not charging for the entire billing cycle. For example, a customer signs up for a new plan in the middle of the month; in such cases, the company uses prorated billing to charge the customer from the activation date of service and not from the first of the month. With this feature, businesses can enable their customers to control their subscriptions, like enrolling, plan swapping, and canceling the services at any time.

The proration in telecom billing and subscription-based billing is a standard feature; it plays a crucial role in billing computations whenever changes in the subscription plan happen before the next invoice date, where the invoice amount is calculated based on the actual number of days (billable period) for the opted plan. With the help of prorated billing, businesses keep the transparency in billing, plus also provide the customer with the flexibility to make the changes in their subscription plan anytime they want.

The EarnBill Billing Engine provides flexibility and options to handle it at the subscription order level, and once enabled, your customers will only be billed automatically for the partial period.

Let’s understand further how proration works in different use cases, especially when changes happen in the middle of the billing cycle.

Suppose someone opts for a monthly plan of $60.00 on the 16th of the month and starts using the services from the 16th; in such cases, the user gets billed for 15 days when the billing cycle date is the 1st of the month, which means the user would get an invoice of $30 for the first month. However, from next month onwards, the company will continue to bill as per the plan fee until no changes happen.

SaaS-based companies often allow consumers to cancel the subscription anytime; as a result, they need prorated billing to calculate the charges if the services get canceled before the next billing date. Let’s look at the illustration below, which shows how prorated billing works when a user cancels a monthly $60.00 subscription plan.

As shown in the diagram, suppose the customer billing cycle is the 1st of every month.

Last billing date: 1st Nov
Cancellation date: 20th Nov
Next billing date: 1st Dec
Number of billable days in current billing cycle: 20
Prorated invoice amount: ($60/30) * 20 = $40
Number of days not to be billed: 10
Refund amount: $60 – $40 = $20

In the case of a prepaid subscription, the company may refund the remaining $20 to the user based on agreed terms and conditions or give a credit of $20.00; that user can utilize this amount to buy another subscription.

It is another essential feature for subscription and SaaS-based business models that gives the flexibility to change the plan anytime. Upgrade is when the customer goes from a lower-tier plan to a higher-tier plan, and Downgrade is when the customer switches from a higher-tier plan to a lower-tier plan.

Therefore, businesses need prorated billing to determine the difference amount whenever a customer swaps a plan (an upgrade or downgrade). The difference amount is something that the customer has to pay other than the regular monthly fee in case of a plan upgrade; however, in case of a downgrade, the customer does not need to pay anything extra since the customer gets credit and adjusted in the subsequent billing cycle.

The example below shows how prorated billing works in prepaid subscriptions. Customers who have postpaid subscriptions pay the prorated costs in the next billing for both higher-tier and lower-tier plans. Let’s consider the company offers two plans as below:

Lower-tier Monthly Plan: $60.00
Higher-tier Monthly Plan: $150.00

It’s about adjusting the quantity of the free usage pool (quota) in the following scenarios.

a) When a user subscribes to a plan that offers a certain free quota (a Free Usage Pool) in the middle of the billing cycle.
b) When a user cancels a subscription in the middle of the billing cycle.

EarnBill provides a configurable option to prorate the FUP quantity; if enabled at the subscription order level, the system automatically reduces the Free Units depending on when the user subscribes or cancels the plan.

Suppose the company billing cycle is on the first of each month, and a customer opts for a $60 monthly plan on April 16, which comes with 100 free minutes of calls (FUP) for the entire month. However, the customer subscribed in the middle of the billing period (on April 16); hence, the customer will get prorated free minutes for the April 16-April 30 period (15 days) as below.

Prorated Subscription Charges: $30.00
Prorated Free Minutes: 50 minutes (instead of 100 minutes)

The same rule applies when a customer cancels a subscription in the middle of the billing period.

Now we know how proration helps in different use cases of billing. It is a valuable feature for telecom billing, SAAS-based, and subscription-based companies that facilitates customers switching plans at their convenience. EarnBill’s prorated solution offers flexibility and customized pricing strategies to meet specific requirements and help companies build trust through fair invoicing practices, provide transparency, and retain customers.