Blog > What are Prorated Charges?

What are Prorated Charges?

By |Published On: December 16th, 2022|

Prorated bills are an incredibly useful tool that offers benefits to both merchants, as well as their clients. When you prorate a bill, you ensure that customer is only paying for what they use.

To better understand what a prorated fee is, you can first look at what the word prorated actually means. The word prorated stems from pro rata, a Latin phrase that means in proportion to. So, a prorated bill is a fee that’s in proportion to the amount of time a customer has been subscribed to a particular service.

Let’s take a look at how this actually works…

How does prorated billing work?

A prorated fee is used for scenarios where a customer subscribes or unsubscribes from a particular service before or after the start date of the billing cycle.

Customers who subscribe before or after the start of a billing cycle to merchants’ services that use prorated costs will receive a prorated invoice. Merchants prorate invoices to ensure their customers are only charged for what they’ve used.

Now that you understand what a prorated fee is, it’s important to know how to prorate an invoice.

How to prorate a bill

The price of an invoice or bill is calculated in proportion to the number of days the customer has subscribed to the service in the billing cycle. So, by dividing the overall price of a month’s subscription fee by the number of days in the month, a merchant can calculate the price of an individual day’s subscription fee. After that, all the merchant needs to do is add the number of days the customer has used the service and charge the respective amount for the services used.

Calculating Prorated Bills

Customers that subscribe halfway through a billing cycle will not be charged the full amount of the billing cycle and instead, will only be charged for the number of days they’ve been subscribed. Therefore, the prorated price is basically a fraction of the overall cost of a monthly subscription fee.

Prorated billing can serve as a great tool for businesses to offer to customers who are interested in or currently using their subscription services.

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Why merchants should consider prorated billing

Prorated billing essentially decreases the loss of revenue for merchants by improving the accuracy of billing. Inaccurate billing can damage the reputation of any company, so ensuring customer transactions are properly tracked and billed is an essential function of any merchant service.

Without prorated billing, customers who cancel their subscriptions to a particular service midway through a billing cycle could be charged for the entire billing cycle rather than the time they were subscribed.

On the other hand, if a customer cancels their subscription a few days after the billing cycle has begun and the merchant refunds the customer for the entire billing cycle, the merchant would then lose money on the services used by the customer for that particular month. Prorated billing would eliminate this issue by allowing the merchant to refund the amount charged for each day the customer used the service during that month, rather than having to refund the amount for the entire month.

Examples of prorated charges

To paint a more detailed picture of the importance of prorated charges, let’s take a look at some examples.

Let’s say we’re looking at a billing cycle for the month of April and the start of the billing cycle is April 1. In this scenario, a customer subscribes to a service 10 days into a 30-day billing cycle. With a prorated payment, the customer would only have to pay for the remaining 20 days of the billing cycle instead of being billed for the entire month. The following billing cycle, the customer would revert back to paying the full amount.

Now, let’s say the same customer has enjoyed their subscription service for a few months but they’ve decided to unsubscribe. The customer makes the decision to unsubscribe on Dec. 15, with the start of the billing cycle beginning on Dec. 1 and ending on Dec. 31. With prorated billing, the customer can unsubscribe on this date and will only have to pay for the 15 days of use instead of the entire month — cutting the bill in half.

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The necessity of prorated billing

It’s important to only charge customers for the services they use. No one likes being overcharged for products or services, hence the importance of prorated prices.

If a customer only uses a service for a certain amount of time, he or she should only have to pay for the amount of time the service was used. While there are many reasons as to why prorated fees are a necessity, one of the main incentives is to simply be fair to your customers.

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