What Does Prorated Mean?
The term "prorated" or "pro-rate" stems from the Latin pro rata which roughly translates as "in proportion to" in English.
Prorated billing simply means that a bill or invoice is calculated based on the cost per day, or the proportion of the monthly service used. Essentially, prorated billing ensures that customers only pay for the number of days they use a service.
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 partway through their billing cycle. In these cases, using prorated billing can help keep payments fair for your customers and your business.
How Prorated Billing Works
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 becoming upset about being overcharged, or that your business may be losing revenue due to mid-month cancellations.
Example of Prorated Billing
If a customer signs up on the 12th of the month and your subscription is set to bill all new customers on the 1st of the next month, they will be billed for 18 days of service, which is the portion of the previous month that they were a customer.
On the first of the following month, June 1st, the customer will be charged for the full 30 days because they are now in sync with the billing cycle.
In review, if a new customer signs up halfway through a given month, they will only be billed for the portion of the month that they were your customer.
Why Merchants Should Use Prorated Billing
If your business does not have a 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 opt to give them a partial refund. On the other hand, if you refund them their entire monthly fee, then your business will be losing out on 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 dollars as per services rendered.
To get the most out of prorating, be sure to check out a payment provider that offers automated prorated billing. This removes manual calculations and human error from your billing system to ensure you and your customers are getting the most out of it.
When Should You Prorate a Customer's Bill?
You want to ensure you're only charging customers for the time (number of days) they used your services. Some examples of when you would use prorated billing include:
- 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 charge your customers fairly for the services they receive. Billing them fairly keeps them happy and your business thriving!