What is Prorated Billing – Subscription Billing?

From time to time, customers cancel their subscriptions in the middle of a billing period. What can businesses do? Can businesses make customers pay for the total period that they had signed up for or charge them precisely for the services that have been used? With the help of prorated billing, it is ensured that your customers are being charged accurately and fairly. 

What is Prorated Billing?

Prorated billing is defined as charging the customers only for the period that they have used a specific product or service. This billing method is quite relevant for subscription-based or SaaS model businesses. In the subscription-based model, orders and revenue streams are recurring in nature. When the customer signs up for a subscription, he or she is agreeing to pay a specific amount at regular intervals in turn for using the products or services.

The billing amount will depend on the plan the customer has subscribed to along with the total duration of time they are subscribed to the plan. In a typical case, the customer is subscribed to the same plan. The customer also makes the recurring payments as per the plan. However, billing can become challenging when the customer decides to make modifications or switch the plan before the upcoming billing renewal date. 

In such a scenario, the billing amount is calculated depending on the total number of days under a specific plan. This is called prorated billing. 

Benefits of Prorated Subscription Billing

Proration plays a crucial role in streamlining the billing, invoicing, and payment processing of accounts without the hassles of refunds, chargebacks, or adjustments.

  • Hassle-free Returns & Refunds: Inaccurate can damage a company’s overall reputation. Additionally, it complicates the entire accounting process for the billing cycle. If the credit card of the customer has been charged inaccurately, businesses are expected to refund the difference for the downgraded plan or partially unused billing period. The same applies for upgrades or new services purchases part way through a billing cycle. In both the cases, not having a clear system and policy for prorated billing creates extra work for the business and also has the potential to harm customer relationships. It can also lead to unnecessary processing fees and even chargebacks.
  • Accurate Billing: With the help of proration, customers have confidence they are only being charged for services that they are actually using. This helps improve trust and build long term loyalty. Using prorated billing, businesses can maintain accuracy and transparency in their billing policies. Businesses are still being compensated for services used, as well as upgrades and downgrades, while only charging prorated amounts to customers.  This can be especially helpful for SaaS subscription payment processing and other online service businesses that accept electronic payments. 
  • Usage-centric Fair Charges: Through the use of recurring and subscription-based billing systems, it is possible to simplify the adjustment and billing process with fair dealings and transparency. It is achieved with the help of prorated billing that helps in determining the accurate charges. Whether it is about upgrading or downgrading the plan, businesses can charge customers for only what they have utilized in the given billing cycle.

Prorated Billing Helping a Subscription Business

A subscription billing business, or SaaS subscription provider, might use prorated billing in the following scenarios:

  • Upgrading a Plan: A customer who is currently subscribed to the plan might think of switching to a better plan with a different range of benefits, pricing, and features. When the subscription business offers customers the overall flexibility to upgrade plans, then prorated billing is required to calculate the exact amount customers should be paying for upgrades. 
  • Downgrading the Plan: In this case, rather than upgrading, you customer will switch to a lower plan. The calculation method remains the same. However, in this case, instead of asking the customers pay, there is a credit that is required to be adjusted against the next billing of the customer. 

How to Ensure Prorated Billing is Being Used Effectively?

Proration is not always simple. In some scenarios, with upgrades, feature removals, and early terminations, the calculations can be complex especially when there are multiple operations per customers. Here are some tips for prorated subscription billing:

  • Use a Modern Payment Processing Service: With different types of payments and invoices, it can be challenging to collect recurring payments. With a reliable, contemporary payment processing service provider, it becomes easier to collect payments from across the globe.
  • Track the Effects of Proration on Revenues: Revenue recognition is a complicated compliance issue for most SaaS businesses. As payments are prorated, it is important to be aware of the dates when a new subscription is created. Otherwise, it is common to make errors when incorrectly recording payments from subscriptions to properly recognize the revenue when earned.
  • Be Transparent with Customers: Make sure that you remain totally transparent about proration of charges. Policies, prorated amounts, and the method of proration should be clearly explained on invoices. This ensures customers receive positive experience with every interaction. 

Importance of Proration

As most SaaS products enable customers to make changes to their subscription plans within a billing cycle, it is crucial to have the capability to align fees with actual usage. In this manner, the customers are assured that they have only paid for the services they used. It is an excellent way to boost customer engagement, loyalty, and encourage referrals. 

Prorated billing is an excellent way handle subscription changes. However, doing the calculation manually is time-consuming. Switching to a professional subscription management software solution for calculating prorated billing can help saving time significantly. It can also help in preventing expensive errors. 

Customer success plays a crucial role in the failure or success of any SaaS business. Therefore, knowing how to prorate can have a significant impact on the success of the company.

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