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What is Prorated Billing and Why Do You Need it for Your Business?

What Does Prorated Mean?

The word “prorated” or “prorate” is derived from Latin pro-rata, which roughly translates to “in proportion to” in English.

Prorated billing is simply the term used to describe how an invoice or bill is calculated using the cost per day or the percentage of the monthly services used. Prorated billing is essentially ensuring that customers pay only for the days they utilize the service.

A Prorated billing is a great way to simplify determining the partial billing fees on behalf of your customer. This can be particularly beneficial when you provide monthly services and have customers who make adjustments to their account or decide to cancel it during the billing period. In these situations, prorated subscriptions could help keep payment fair for your clients and your business.

Why would you need prorated billing for your subscription company?

  • It’s a reasonable procedure. Customers only pay for the days they’ve used the products or services. This keeps your customers from complaining and will aid in building confidence.
  • You’re always ready. Using prorated subscriptions makes it possible to permit customers to make modifications in their plans at any point instead of waiting until the closing of the billing cycle. If they choose to make changes, you’ll know what they’ll be charged for the difference.
  • It’s better in terms of your profit stream. Prorated Subscriptions ensures that there’s never an occasion when the client receives a better level of service than what they paid for, which means you can offer more plans and add-ons without suffering costs when customers change plans.

What is the reason to rate charges on a pro-rata basis in SaaS?

Since most SaaS Products allow changes to subscription plans during the middle of the billing cycle, it is essential to coordinate the charges for usage based on consumption. To achieve this, it is necessary to have a straightforward method of prorating costs that are fair to your customers and business.

How to incorporate an accelerated billing system into your company

While usage-based billing is an extremely profitable model, businesses can only profit from its benefits if they apply it appropriately. This is our complete guide on how to succeed with proration billing:

Stay in the open

To be honest with your company and your customers, to be fair to your customers and business, you need to be clear and clear on the method you use to calculate your price. You must ensure that your invoices are accurate and that customers know exactly what they’re paying for.

Recurring collect installments.

Prorated bill collections are often stressful and challenging. You will have more bills and options for payment. Be sure to collect your dues to prevent a backlog. With the latest payment technology that is automated, you can effectively manage the collection of your bills prorated.

Adjust offer to meet client demands

Be aware of trends in the market and adjust your offer when necessary. It is essential to remain in front of consumer demand to make sure you keep them satisfied when their preferences change.

Set up a smart and effective refund policy

When customers decide to cancel or reduce their subscriptions during the middle of a billing cycle, most users expect to use your service until the conclusion of the month, not get an amount of money. That means you’ll have more money in your bank, and most of your customers will be content.

It is possible to ignore your policy and offer some refunds to unhappy customers. Also, the annual or quarterly billing generally has a refund policy that guarantees that consumers get fair treatment.

Concentrate on accurate revenue recognition

After you’ve paid all of your bills, make sure that your revenue remains properly recorded. When you create a subscription, ensure you are aware of the dates you choose to enter to know how the proration effect affects the income. Recognizing your bills effectively will ensure that your business doesn’t fall the payment deadline or get into incorrect billing.

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.

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.

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. The human error from your billing system to ensure you and your customers are getting the most out of it.

Final Thoughts

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! Prorated billing is an essential element of running a subscription company as your clients’ needs fluctuate.

Follow the steps correctly, and you’ll be able to make life easier for both your customers and yourself without too much work. Don’t pay attention, and your customers could leave due to being over-billed, or you’ll be leaving revenue in the dust. This isn’t a good option. With a top proration handling software you can set up it in just a few clicks and ensure that everything is working smoothly.

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