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

~ 3 min read | January 3

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.

Bhargavi P

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