What It Means (Simple Explanation)
Proration (also known as prorated billing) is the practice of adjusting the charges a customer owes when there is a change to their contract during a billing cycle. Examples of changes might include upgrades, downgrades, or early cancellations. Proration ensures fairness by billing only for the portion of service the customer had access to, rather than the full standard cycle.
Why Proration Matters in SaaS
– Fairness and Trust: It ensures customers pay only for the days they used a service—whether they sign up mid‑month, cancel early, or switch plans.
– Accurate Billing & Transparency: Proration avoids overcharging or undercharging and boosts overall billing clarity.
– Supports Plan Changes: Enables mid‑cycle upgrades or downgrades to be reflected immediately in invoices, without waiting for the next billing cycle.
How Proration Works (Formula)
Prorated Charge = (Full Period Price ÷ Days in Billing Cycle) × Days Used
Example:
Monthly plan: $90
Days in month: 30
Customer uses service for 21 days:
Daily rate = $90 ÷ 30 = $3/day
Prorated charge = 3 × 21 = $63
Common Proration Scenarios in SaaS
- Mid‑Cycle Signups: A new customer registers on the 15th of a 30-day month. Proration ensures the customer is only charged for the last 15 days of the billing period when they actually had access to the service.
- Upgrades: A customer upgrades from the Pro (lowest tier) to the Business (middle-tier) plan on the 20th day of a 30-day month. Proration calculates the additional charges owed for the last 10 days of the billing cycle and adds a line item to the invoice.
- Downgrades: A customer downgrades from ten users to five on the 10th day of a 30-day billing cycle. Most SaaS and subscription providers will not prorate the charges, but instead revise the billing starting with the following period.
- Cancellations: A customer cancels a pay-as-you-go plan on the 2nd day of a 30-day billing period. Some SaaS and subscription providers will provide a refund or credit for the prorated amount based on the 28 days remaining in the billing period. Others will not refund any fees but discontinue billing in future periods.
