How does Proration work & why is it important in SaaS?

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| Last Updated: May 25, 2017 |

Reading time: 2 minutes

When a customer changes the subscription plan / quantity in the middle of the billing cycle, we should always pro-rate charges for the rest of the billing period. Depending on whether it is an upgrade / downgrade the appropriate proration logic should be applied.

Why is it important to prorate charges in SaaS?

Since most SaaS Products allow changes to subscription plans in the middle of a billing cycle, it is important to align usage charges based on consumption. To make this effective, you need a clear & unambiguous way of prorating charges that is fair to your business & customer.

Proration with Upgrades:

When a subscription is upgraded, ChargeBee calculates the amount for the remaining period of the new plan and adds that as a line item to the invoice generated during the plan change.

Current Plan: $100 / month

New plan: $150 / month

Proration logic:

  • $100 paid at the beginning of billing cycle.
  • Assume, changes are made exactly in the middle of billing cycle.
  • Prorated “consumed” charge $50.
  • Prorated credit remaining is $50.
  • Additional charge on new plan for remaining period: $75
  • Net additional charges after adjusting credits: $25.

Proration for SaaS - Upgrade

Proration with Downgrades:

When a subscription is downgraded, the customer is more likely to have paid more than the expected usage in the middle of billing cycle. There will be a net credit to customer. This needs to reflect unambiguously in the invoice line items, with appropriate charges.

Current Plan: $150 / month

New Plan: $100 / month

Proration Logic:

  • $150 paid at the beginning of the billing cycle
  • Assume, changes are made exactly in the middle of billing cycle.
  • Prorated “consumed” charge $75
  • Prorated credit remaining is $75
  • The charge on the new plan for the remaining period: $50

Proration for SaaS - Downgrade

Net additional credits after adjusting credits $25.

Here is what the next billing cycle would look like:

Proration for SaaS - Downgrade next Billing

When is a prorated invoice generated in ChargeBee?

An invoice is generated only when a charge occurs, in cases of:

  • A plan change
  • A quantity change
  • An addon change

When certain recurring charges are removed from a subscription, there is no additional charge and customer is due to receive credits. So there is no invoice generated. (Ideally a credit note is issued but in a Subscription system, this is tracked internally & displayed in subsequent invoice).

Note: Proration occurs by default when a subscription is changed. If you need to disable proration, you need to explicitly specify that pro-ration need not be applied, through the admin console or the API for every transaction.

Do you have additional scenarios that need clarification? Do let us know.

Author of the post

Bhargavi P

Product Marketer at Chargebee. Coffee Addict, Music Explorer, Avid Reader, Poet.

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