Prepaid Usage Credits: The Short Version
Prepaid usage contracts offer customers a compelling way to secure discounted rates by forecasting and prepaying for their consumption. This model involves a rating engine meticulously tracking an initial credit balance, applying ongoing debits from usage, and managing any additional credits or expirations. Understanding how these systems calculate opening balances, process monthly drawdowns, and handle potential overages is crucial for both providers and consumers leveraging this flexible pricing structure.
Prepaid Credits: What Finance Teams Need to Know
- Prepaid usage contracts allow customers to access discounted rates by committing to future consumption, making them ideal for predictable usage.
- Effective management of prepaid credits by rating engines involves both precise tracking of the evolving balance and consistent monthly drawdown of usage.
- Prepaid credits typically come with expiration dates, meaning customers must consume their allocated volume within a specific timeframe to avoid forfeiture.
- When prepaid balances are depleted, businesses can implement auto-replenishment or overage billing, each with distinct pricing mechanisms.
Why Customers Purchase Prepaid Credits for Usage-Based Pricing
In scenarios where a customer is able to accurately forecast the amount of usage they will consume for a specific product over the next year, a prepaid usage contract can be an attractive option. The customer will prepay for all (or a percentage) of their forecasted usage amount in exchange for a discounted rate. Each month as the product(s) is consumed, there is a drawdown against the prepaid usage balance until it is depleted. Prepaid usage credits typically come with an expiration date, which means the customer needs to consume a certain volume of the product before the deadline.
- Tracking Prepaid Credit Balance – The current balance of prepaid credits will need to be determined by analyzing the usage over the prior periods as well as applying any new debits or credits.
- Monthly Drawdown of Prepaid Credits – The current month’s billable usage quantity will need to be calculated and debited against the prepaid balance. If the customer has depleted all their credits then a new invoice will be generated to cover the deficit or replenish the balance.
Let’s review the process for how the rating engine computes charges for contracts with prepaid usage in more detail with examples.
Step 1
Tracking Prepaid Credit Balance
- Ending Balance – The end balance from the last billing period (last month) will be looked up for each account.
- Apply Credits – Some SaaS and cloud providers offer entitlements such as “free units” or “included units” in each billing period. These additional units will need to be credited to the account balance.
- Apply Debits – Prepaid usage typically has an expiration date associated with it. The rating engine will need to review the expiration dates for the units and deduct any which expired in the period.
- Calculate Opening Balance – Last period’s ending balance will be adjusted by adding the credits and debits to arrive at an updated opening balance for the period.
Suppose that a customer purchased 10,000 prepaid units of product A in January. At the end of last month (September 30), the customer had 4,000 prepaid units remaining. Each month the customer is entitled to 500 included units at no additional cost. In addition, some of the units purchased in January expired after 9 months. Specifically, 1,000 of the remaining 4,000 prepaid units expired on September 30th. To arrive at the updated prepaid balance, the rating engine will perform the following steps:
- Last Period Ending Balance = 4,000
- Credits = +500 included units
- Debits = -1000 expired units
- Opening Balance = 4,000 + 500 – 1000 = 3,500
Step 2
Monthly Drawdown of Prepaid Credits
Next, the rating engine will need to determine the billable usage quantity based upon the customer’s actual consumption during the period. The billable usage quantity will be deducted from the opening balance to arrive at an updated, ending balance.
Continuing the example from above, suppose the billable usage quantity for the month of October was 1,500 units. The rating engine would perform the monthly drawdown calculation as follows:
- Opening Balance = 3,500
- Billable Usage Quantity = 1,500
- Adjusted Balance = 2,000
Since the customer has sufficient prepaid units to cover the month’s usage the customer does not owe the SaaS or cloud provider any additional funds. A $0 invoice may be issued to the customer, but no payment will be required.
However, suppose that the monthly billable usage in October was 4,000 due to a spike in usage during the period. The rating engine would perform the monthly drawdown calculation:
- Opening Balance = 3,500
- Billable Usage Quantity = 4,000
- Adjusted Balance = -500
- Auto-Replenishment – The customer agreed to replenish low (or negative) balances automatically. In such a case, a new invoice would be generated for the auto-replenishment quantity. If the customer has a negative balance, the replenishment quantity will be adjusted to cover the deficit.
- Overage Billing – The customer is billed for the additional units that were not covered by the prepaid balance. The rating engine will need to determine the price for the overage units. The price could be 1) the list price, 2) the same price the last prepaid units were purchased at, or 3) another pre-negotiated price.
Continuing the example from above, suppose that the customer had an auto-replenishment trigger established to purchase 5,000 additional units in a low balance scenario.
- Price per unit (discounted) = $1
- Invoiced amount = 5,000 x $1 = $5,000
- Adjusted Balance = -500
- Auto-Replenishment Quantity = 5,000
- Ending Balance = 4,500
Alternatively, the customer could be billed for the overage at the list price of $2 per unit.
- Negative Balance = 500 units
- Price per unit = $2
- Invoiced Amount = $1,000
Next Steps for Prepaid Usage Billing
Prepaid usage contracts offer a powerful incentive for customers seeking cost savings on predictable consumption, while providing providers with revenue predictability. The sophisticated process of tracking prepaid balances—accounting for initial purchases, ongoing usage, additional credits, and expirations—is fundamental to the system’s integrity. Ensuring clear contract terms for balance management and handling overages is paramount for a smooth customer experience and accurate billing.
Frequently Asked Questions
Prepaid usage credits let customers commit to future consumption upfront at discounted rates, with a rating engine tracking the balance and deducting usage monthly until expiration or depletion.
Yes, prepaid credits typically come with expiration dates, so customers must consume their allocated volume within the specified timeframe or lose the remaining balance.
When prepaid balances are depleted, you can implement auto-replenishment to renew credits or switch to overage billing at a different rate.
Rating engines track the opening balance, apply monthly debits from usage, manage credit additions, and monitor expiration dates to maintain accurate prepaid account states.
