What is proration?
Proration is a way to determine how much something costs when you only use it part-way. In business, it’s used to figure out how much something costs based on how much of the payment time has been used.
For instance, if a customer signs up for a monthly service on July 15 and is billed on the first of every month, Proration will figure out how much it costs for the 15 days that have already been used instead of charging the total amount for 30 days.
Usage-based billing, like what a provider or public utility does, means that the billing company will track how much the customer uses for part of the month and the following month. Based on that usage, they will then determine how much the customer should pay.
Proration ensures that customers are charged fairly for the goods and services they’ve used.
- I am making the billing process more accessible by automating estimates of partial use.
- They are reducing errors that occur when doing numbers by hand.
Software-as-a-service (SaaS) companies, telcos, streaming services, and other companies that make money regularly often use this price method.
Customers are more likely to stay with a business and buy from it again if they can pay in installments. This is because customers generally have a better experience.
Synonyms
- Prorated Payment: A payment calculated based on the time a customer has used a product or service in a single accounting period.
- Prorated Invoice: An invoice that includes a prorated payment for goods or services used in part of a billing cycle.
- Proration in Billing: Calculating a payment amount for the goods or services used during part of a billing cycle.
How to Figure Out Proration
To figure out the proration factor, you have to divide the total amount of the product or service used by the total number of billing days.
But figuring out prorations by hand for each customer takes time and work. Billing teams must monitor the proration time and use the above two-part formula to determine the amount.
Proration Time
This is the time between when the subscription starts and when the first billing term applies.
If a customer starts using a subscription-based product on July 15 and is billed every 30 days, they will have used 15 services.
Formula for Proration
Here is the method for figuring out proration:
(Total Amount Used ÷ Total Number of Days) × Proration Period = Prorated Payment
The total amount used in the case above would be 15 days. There are 30 days in a month. The time for Proration is 15 days.
To find the cost for this partial use, divide the total cost of the good or service (for example, $100) by 30 days and then increase that number by 15 days:
(100 ÷ 30) x 15 = $50
This means the customer should not be charged $100 for all the services they used in one month but only $50 for those services.
Calculate-Price-Quote (CPQ) and Billing, as well as Proration
Companies use CPQ software to make selling, pricing, configuring products, and placing orders more efficient. Since there is no need for manual calculations, billing errors are less likely to occur, and customers receive accurate charges for the goods and services they use.
CPQ systems automatically determine the proration factor for each user based on the billing cycle when they make quotes and invoices. This makes paying more manageable and ensures customers are charged fairly for their services and goods.
A prorate multiplier is used to figure this out. This is the part of the billing period that the customer has used. The factor is then added to the total cost of the goods and services to spread out the correct payment amount over time.
CPQ systems can also tell the difference between different types of Proration, like partial month and partial year, and change the multiplier to match. This helps businesses make sure they bill each customer correctly, no matter when their subscription started or finished.
