What is SaaS Prorated Billing?

SaaS prorated billing is a method where customers are charged only for the exact portion of the subscription period they use.  This is especially relevant when a customer signs up, cancels, upgrades, or downgrades their plan in the middle of a billing cycle.

This practice is important because it establishes fairness and transparency in your billing, which builds customer trust and loyalty. By offering the flexibility to make changes at any time without being overcharged, businesses can reduce customer churn and create a significant competitive advantage.

The calculation relies on a simple, two-step principle that is relevant to most customer scenarios, including flat-fee  and usage-based business models:

1. First, understand the daily rate by dividing the total cost of the subscription (e.g., the monthly fee) by the exact number of days in the specific billing plan.
2. Then determine the charge by multiplying the daily rate by the exact amount of days the service was used by the customer at that specific amount.
   
   Below are explanations of how this method is relevant to the following common billing actions:
   

• Upgrades & Downgrades: When a customer changes plans mid-cycle, the cost is based on the days spent on the old plan, and another calculation is done for the remaining number of days on the new plan. The final charge or credit will be the sum of these two amounts.
• Cancellations: The same principle is used to determine a refund or final charge. For instance, if a customer on a **$60/month plan**  cancels on day 15 of a 30-day month, the daily rate is **$2**  ($60 / 30 days). The final charge would be **$30**  (15 days × $2).
• Usage-Based Billing: SaaS proration also applies here but relies on accurate usage tracking. Costs are calculated proportionally based on the resources used during the specific time periods within the subscription’s billing cycle, ensuring the final bill harmonizes cost with value.

While overall advantageous, be mindful of some hurdles before you decide to build proration into your platform:

• Complexité de la facturation: It is necessary to have a strong billing system. Relying on manual calculations or basic spreadsheets is not possible and will likely lead to errors that prove to be costly.
• Customer Confusion: If the calculations are not easily understood and  clearly displayed on invoices, it will create confusion and damage the trust you’re trying to build.
• Revenue Forecasting: Short-term revenue forecasting can lead to more challenges due to the change in small, variable billing amounts generated each month.

Implementing proration goes beyond the math because it utilizes your tools and processes.

• Billing Software: The most dependable way to implement proration is by partnering with a modern subscription management platform. Services such as PayPro Global have automated proration engines included in the service, which manage all the complicated calculations for upgrades, downgrades, and cancellations. Manually calculating this is not scalable and is prone to errors, and will not be done accurately or instantly.
• Internal Processes: Be sure  your entire team is aligned. This requires your customer support and finance staff to be trained on your company’s specific proration policy so they are able to answer customer questions confidently and manage financial records correctly.

Not always. While proration is typically seen as fair, you still have to adopt a strategic mindset about your policy so be  transparent about your rules in your terms of service.

• Prorating Upgrades: It’s usually a great practice to prorate upgrades. This entices customers to move to a higher tier immediately where they can get instant access without paying for two plans at once.
  
• Handling Downgrades or Cancellations: This is a matter of choice. And some businesses decide not to prorate downgrades or cancellations. Instead, the change takes effect at the end of the current paid cycle. This can help discourage Attrition and simplify billing, but be warned, it can be perceived as less flexible by customers.

Proration impacts how you track your financial health, especially your Monthly Recurring Revenue (MRR).

• MRR Fluctuations: Prorated charges cause a small, one-time adjustment to your MRR. For example, when a customer upgrades, the prorated charge will inflate your MRR for that month, but it doesn’t carry over into the next month’s recurring revenue. Your financial analytics tool must distinguish between true recurring revenue and these one-off adjustments.
• Comptabilisation des revenus: From an accounting perspective, prorated charges and credits must be correctly calculated in the period they are earned. This maintains your financial integrity on statements and accurately reflects the company’s performance, a key requirement for financial audits or investment rounds.

Clarity on your invoice is the best way to prevent customer support tickets and billing disputes. Avoid showing a single, confusing number. Instead, break down the charges with clear line items.

A best-practice invoice should explicitly show the credit for unused time on the old plan and the new charge for the time on the new plan.