Prorated billing simply means that a bill or invoice is calculated based on the cost per day, so customers only pay for the number of days they use a service for.
Using prorated billing can simplify the process of determining partial billing charges for your customers. This can be especially helpful if you offer services on a monthly basis and have customers who make changes to, or cancel, their accounts part way through the billing cycle. In these cases, using prorated billing can help keep payments fair for your customers, and for your business.
The Risk of Not Using Prorated Billing
If your business does not have prorated billing setup and a customer cancels their plan at the beginning of the month, then your business will be overcharging the customer for services they did not use unless you give a partial refund. On the other side, if you refund them their entire monthly fee then your business will be losing revenue.
For example, if a customer has a monthly plan that renews on the 1st of each month but they canceled their plan on the 6th, by refunding them the full monthly fee your business loses out on six days of revenue. If this were to become a regular occurrence, then your business may lose out on a significant amount of potential revenue.
How Does Prorated Billing Solve This?
Because prorated billing calculates the bill based on the percentage of the month that was used by the customer, if any changes are made to the package, or if the customer cancels, prorated billing will adjust their final bill to be proportional to what the customer should pay. You do not need to worry about customers being upset about being overcharged, or that your business is losing revenue based on mid-month cancellations.
If a new customer signs up mid-way through the month, they would only be billed for the portion of the month where they are your customer. For example, if a customer signs up on April 12th, then on the 1st of May the customer will be billed for 18 days, which is the portion of the previous month that they were a customer for. On the first of the following month, June 1st, the customer will be charged for the full 30 days because they are now synced with the billing cycle.
When Should You Prorate a Customer’s Bill?
You want to ensure you’re only charging customers for the time that they used your services for, this includes:
- Consolidating subscription payments onto the 1st of every month
- When customers upgrade or downgrade their plans
- Mid-month plan cancellations or activations
By implementing prorated billing for your business, you will keep customers happy because they are being charged fairly for the services they receive.