How does Proration work & why is it important in SaaS?
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 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
Net additional credits after adjusting credits $25.
Here is what the next billing cycle would look like:
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.
