Proration ensures that customers are billed fairly when they switch to a higher-tier product in the middle of a billing cycle.
This feature calculates the remaining value of the current subscription and adjusts the billing amount for the upgrade accordingly.
How Does Proration Work in Upgrades?
Let’s understand the proration process with this use case.
Suppose a customer is subscribed to a $100/month plan and decides to upgrade to a $200/month plan.
But he has already exhausted 15 days of his plan; another 15 days are left in the month.
Let’s understand proration in this case.
1. Calculate the unused value
Determine the amount of the current subscription that remains unused for the billing period.
For example, if the customer is halfway through a $100 monthly plan, the unused value is $50.
2. Deduct the unused value
Subtract the unused value of the current plan from the total cost of the upgraded plan.
For instance, if the new plan costs $200, the customer pays $200 – $50 = $150.
3. Charge the difference
The customer is charged only the prorated difference immediately, ensuring they get value for the money they’ve already spent.
Here’s a formula for calculating the daily rate:
Daily Rate = Full Billing Amount ÷ Number of Days in Billing Cycle
Next, use it to calculate the prorated amount:
Prorated Charge = Daily Rate × Number of Days Used
Let’s understand from the use case above,
Total subscription cost = $100
Total days in billing cycle = 30
Number of days used = 15
Daily Rate = $100 ÷ 30 = $3.34
Prorated Charge = $3.34 x 15 = $50
The prorated charge here is $50.
Now, if a customer wants to upgrade to a $200 plan, subtract the prorated amount from the total cost, which is $200 – $50 = $150.
How Does Proration Work in Downgrades?
Suppose a customer is subscribed to a $100/month plan and decides to downgrade to a $50/month plan.
But he has already exhausted 15 days of his plan; another 15 days are left in the month.
1. Credit calculation for the higher-tier plan
Calculate the value of the unused time on the current higher-tier plan ($50).
This will be applied as a credit towards the cost of the downgraded plan for the remaining billing cycle.
2. Charge for the lower-tier plan
Calculate the cost of the downgraded plan for the remaining time in the current cycle.
This cost will be $25 (or 15 extra billing days).
3. Adjust final billing
Deduct the credit from the downgraded plan’s cost. If the credit exceeds the downgraded plan cost, the remaining balance will be adjusted during the billing cycle.
The customer will receive 15 extra billing days, which will be adjusted accordingly.
