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 swapping, plan swapping, and canceling the services at any time.
Why is proration essential?
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 noted 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 explore how proration works in different use cases, especially when changes happen in the middle of the billing cycle.
Prorated Billing Use Cases
Understanding how proration works across different scenarios
Subscribes to a plan
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.
Example Calculation:
Cancel Subscription
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.
Example Calculation:
As shown in the diagram, suppose the customer billing cycle is the 1st of every month.
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.
Plan Swap (Upgrade or Downgrade)
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 an 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
Plan Swap Calculations:
The example shows prorated billing calculations for both upgrade and downgrade scenarios in a prepaid subscription model.
FUP (Free Usage Pool / Quota) Proration
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
Benefits of Prorated Billing
Empower your customers with flexible billing that adapts to their changing needs
Billing Transparency
Prorated billing ensures customers only pay for the services they actually use, creating trust and transparency in billing relationships.
Customer Flexibility
Enable customers to upgrade, downgrade, or cancel subscriptions at any time without worrying about overpaying for unused services.
Automated Calculations
EarnBill automatically handles complex proration calculations, eliminating manual errors and ensuring accurate billing every time.
Increased Customer Satisfaction
Fair and accurate billing practices lead to higher customer satisfaction, reduced churn, and improved customer lifetime value.
Ready to Implement Prorated Billing?
Discover how EarnBill's prorated billing features can provide flexibility and transparency for your customers