Prorated billing 101: What it is and how it works
A customer upgrades their plan halfway through the month. Do you charge full price for the new plan? Give them the old plan for free until renewal? Try to charge them based on usage, or calculate the exact difference?
Most subscription businesses run into this question early, and the answer for most companies is prorated billing. Other options can easily lead to either overcharging customers or leaving money on the table.
This guide covers what proration means, how to calculate prorated charges, when to apply them, and what to look for in a billing system that handles proration automatically.
What is prorated billing?
Prorated billing adjusts charges so customers pay only for the portion of a billing period they actually used a service. Instead of billing for a full month regardless of when a change happened, you calculate the exact fraction of the period the customer was on each plan and charge accordingly.
Proration applies whenever a subscription change happens mid-cycle like for signups, upgrades, downgrades, cancellations, and seat additions. Proration allows for accurate billing mid-cycle and across different plans.
The proration formula is straightforward:
Proration formula
(Days used ÷ Days in billing period) × Full period price = Prorated charge
For example, if a plan costs $60/month and a customer used it for 10 out of 30 days, their prorated charge is ($10 ÷ 30) × $60 = $20.
Proration also has direct implications for how software companies recognize revenue under ASC 606. When a customer upgrades mid-cycle, the contract has been modified — and accurate proration data is what makes sure the right amount is recognized for the right period.
How does prorated charges work?
There are two sides to proration: charges and credits.
A prorated charge is the partial-period amount billed when a customer upgrades or adds seats mid-cycle. If a customer moves to a higher-tier plan on day 20 of a 30-day billing period, they're charged for 10 days on the new plan, not the full month.
A prorated credit is the refund or account credit issued for the unused portion of the old plan after a downgrade or cancellation. If the customer was on a $90/month plan and downgraded on day 20, they'd receive a credit for the 10 days they didn't use.
Here's how that plays out in practice:
Example: mid-cycle upgrade
The customer is on a $90/month plan. On day 20 of a 30-day billing cycle, they upgrade to a $150/month plan.
Prorated credit for old plan: (10 days remaining ÷ 30 days) × $90 = $30 credit
Prorated charge for new plan: (10 days remaining ÷ 30 days) × $150 = $50 charge
Net charge at time of upgrade: $50 − $30 = $20
At the next renewal, the customer pays the full $150/month.
How these charges and credits appear on an invoice matters, too. Clean line items for both the credit on the old plan and the one for the charge on the new plan, reduce customer confusion and support tickets.
When should subscription businesses use proration?
Proration shows up across the full subscription lifecycle, not just at upgrade time. Here's where it's most commonly applied:
Mid-cycle plan upgrades and downgrades, where the price changes but the billing period is already in progress.
Adding or removing seats or users in a per-seat model, where the per-unit math needs to reflect the remaining days.
Mid-month signups, where a new customer joins partway through the billing cycle and shouldn't be charged for days they didn't have access.
Cancellations with partial refunds or credits, where the customer is owed something back for unused time.
Trial-to-paid conversions that land mid-cycle, where the paid period needs to align with the billing cadence.
Calendar billing, where a business consolidates multiple subscriptions onto a single invoice date and proration aligns each subscription to that date.
Any time the billing period and the service delivery period don't perfectly overlap, proration is the mechanism that can reconcile the two.
Prorated billing vs. other billing approaches
Proration is the most precise option for handling mid-cycle changes, but it's not the only one. Subscription businesses typically choose from three approaches:
Full-charge billing: The customer pays the full new price regardless of when the change happens. Simple to implement, but customers who upgrade on day 25 of a 30-day cycle can feel like they're being overcharged. This can lead to angry customers, so it’s important to make this option easy to understand and clearly stated before customers take action.
Next-cycle billing: The method will defer all changes to the start of the next billing period. No mid-cycle adjustment, no proration. It's easy to explain and easy to administer, but it means upgrades don't take effect immediately, which creates friction for customers who want to access new features right now.
Prorated billing charges or credits: The customer pays the new rate based on the exact days remaining in the cycle. It offers a fair approach for the customer while also being the most accurate for your revenue, and the most complex to implement. Additionally, customers get access to full changes right away.
The right choice depends on your business model, your customer expectations, and your billing infrastructure. Many SaaS businesses default to proration for upgrades (customers expect immediate access to the higher plan) and next-cycle billing for downgrades (simpler to administer, fewer refund edge cases).
Why prorated billing matters for subscription businesses
Proration isn't just a billing mechanic. It's a signal about how you treat customers.
Customers expect to pay for what they use. Overbilling, even by accident, erodes trust. If a customer upgrades on day 29 and gets charged a full month for the new plan, they'll notice. That friction contributes to churn in ways that are hard to trace back to the billing event.
Eliminate penalties for upgrading
Proration removes the penalty for upgrading. When customers know they'll only be charged for the time remaining on the new plan, they're less likely to wait until renewal to upgrade. That means faster revenue conversion and a smoother expansion.
Stay compliant with revenue recognition
Accurate proration keeps revenue recognition compliant. Under ASC 606, a mid-cycle plan change is a contract modification. The revenue you recognize needs to reflect what was actually delivered in each period. Clean proration data is what makes that calculation defensible.
Reduce errors
Proration also reduces accounting errors at month-end close. When your billing system generates clean, itemized proration records, your finance team isn't manually reconciling partial-period charges against recognized revenue. That's time back in the close process.
Common challenges with proration
Proration sounds simple in principle. In practice, several things make it harder than expected:
Manual calculations don't scale. When you're handling dozens of mid-cycle changes a day — each with different plan prices, different days remaining, and potentially different currencies — spreadsheets break down quickly. Errors compound, and there's no audit trail.
Month length variation creates rounding issues. A 30-day month and a 31-day month produce different prorated amounts for the same plan price. Multiply this across thousands of subscriptions and the rounding differences add up.
Stacked changes in a single cycle are especially tricky. A customer who upgrades, adds two seats, and applies a coupon code in the same billing period creates a calculation where each change interacts with the others. Most manual approaches aren't built to handle this cleanly.
Tax calculations on prorated amounts add complexity. Prorated charges need to be taxed correctly, which means your proration logic and your tax engine need to work in sync — not always a given with homegrown billing setups.
Invoice clarity is often an afterthought. If customers can't understand why they were charged a specific prorated amount, support volume goes up. Clear line items such as credit for unused time, charge for new time, net amount due, are essential but require deliberate invoice design.
How to set up a prorated billing policy
Before you configure proration in your billing system, make the policy decisions explicit. Ad hoc proration rules create inconsistencies that are hard to untangle later.
Decide when proration applies. Some businesses prorate upgrades but not downgrades. Others prorate everything. Be deliberate about the choice and document it.
Choose how credits are handled. When a customer downgrades or cancels, do unused days generate a refund to the original payment method, a credit applied to the next invoice, or no credit at all? Each has different implications for cash flow and customer experience.
Set the effective date for changes. Does a mid-cycle plan change take effect immediately, or at the next renewal? This decision should be consistent, documented in your terms of service, and reflected in how your billing system applies proration.
Make sure invoices tell the story. A prorated invoice should show the credit for unused time on the old plan, the charge for remaining time on the new plan, and the net amount due as separate line items. Customers who understand their invoice don't open support tickets about it.
Review the policy whenever your pricing changes. New plan tiers, usage-based components, or ramp pricing all affect how proration should work. Build in a review step any time you restructure pricing.
How Recurly handles prorated billing
Recurly handles proration automatically, so your team isn't doing the math by hand or writing custom logic to cover edge cases.
Proration in Recurly is calculated for immediate subscription changes.
Merchants control how proration works for their business. Credits and charges can be configured independently: you can issue a prorated credit for the unused portion of the old plan while charging the full amount for the new plan, or any combination that fits your policy.
Calendar billing in Recurly consolidates multiple subscriptions onto a single invoice date, with automatic proration to align each subscription to that date — useful for enterprise customers managing several products under one account.
On the accounting side, Recurly generates separate credit invoices for prorated credits, keeping them distinct from new charges. That separation makes reconciliation cleaner and gives your finance team the line-item detail they need for accurate revenue recognition.
Ready to see how Recurly handles subscription billing complexity?
