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Understanding Subscription Term Basis and Proration

If you are operating a subscription-based business, you probably heard about "prorations" again and again. Subscription Term Basis and Prorations are critical aspects of subscription quoting and billing that businesses need to comprehend for effective revenue management. However, it doesn't have to be hard. In this knowledge base article, we will delve into the concepts surrounding subscription term basis, explaining how it relates to your subscription start date, and explore prorations – the financial adjustments that occur when a subscription doesn't align perfectly with your billing cycle. Understanding these concepts is essential for businesses aiming to streamline their subscription billing processes and provide clarity to their customers.

Subscription Term Basis

In Nue, the Subscription Term Basis plays a crucial role in calculating the duration of a subscription based on the Start Date and End Date. This configuration is used throughout the revenue lifecycle, from quoting, ordering to billing. Therefore, it is important to understand its implications and ensure alignment of the Subscription Term Basis across Sales, Revenue Operations, and Finance teams.

Nue provides the following 5 different options of Subscription Term Basis, which are aligned with the 5 options of the YEARFRAC function in Excel:

Calculation Method	Description	Formula	Example	Result (Years)	Result (Months)
US (NASD) 30/360	Calculates based on a 30-day month and 360-day year, following the US NASD standard.	`=YEARFRAC(StartDate, EndDate+1, 0)`	Start Date: January 1st, 2023 End Date: August 15th, 2025	2.62500	31.50000
Actual/Actual	Calculates based on the actual number of days in the time period and the actual number of days in the years.	`=YEARFRAC(StartDate, EndDate+1, 1)`	Start Date: January 1st, 2023 End Date: August 15th, 2025	2.62192	31.46301
Actual/360	Calculates based on the actual number of days in the time period and a 360-day year.	`=YEARFRAC(StartDate, EndDate+1, 2)`	Start Date: January 1st, 2023 End Date: August 15th, 2025	2.66111	31.93333
Actual/365	Calculates based on the actual number of days in the time period and a 365-day year.	`=YEARFRAC(StartDate, EndDate+1, 3)`	Start Date: January 1st, 2023 End Date: August 15th, 2025	2.62466	31.49589
European 30/360	Calculates based on a 30-day month and 360-day year, following the European method.	`=YEARFRAC(StartDate, EndDate+1, 4)`	Start Date: January 1st, 2023 End Date: August 15th, 2025	2.62500	31.50000

NOTE

Excel's YEARFRAC function is widely adopted to calculate the fraction of a year between two dates. It's particularly useful for financial and business applications where you need to determine the length of time between two dates in years.

In Excel's YEARFRAC function, the End Date is exclusive of the date in the calculation. For example, days between 01/01/2023 and 01/02/2023 are 1. In Nue, the End Date is inclusive of the date in the calculation for a better user experience. For example, if the Subscription Start and End Date are 01/01/2023 and 01/02/2023, the days calculated for this subscription is 2. Therefore, in the table above, the YEARFRAC formula uses EndDate+1 as the end-date parameter value in the function.
In Nue, the Subscription Term is calculated and stored in the database as 5 decimal points. Though on the Line Editor and other relevant pages it is displayed as 2 decimal points for a clean user experience.
The most commonly used subscription term basis are US (NASD) 30/360 and Actual/Actual. The choice of method often depends on the specific industry standards, regulatory requirements, and the nature of the financial instruments or contracts involved. It's essential to use the method that aligns with the rules and conventions relevant to your particular financial or business application.
The Subscription Term Basis calculation method is used by both Pricing Engine and Billing Engine to determine the subscription terms, billing cycle days, calculate the co-term prorations, and billing prorations.

Setting It Up

After understanding how Subscription Term Basis's calculation method, you can configure the Subscription Term used by your organization by following these steps:

Login to Nue App and click 'Settings' icon in the header
In the Search box, search for 'Subscription Term Basis' and select the search result to open the configuration page
In the Subscription Term Basis option, select the term basis of your choice

After setting it up, you can see it in action in the Line Editor. If you have changed to a new Subscription Term Basis, you may need to refresh your browser to remove the cache. In the following example, we are using US (NASD) 30/360.

Navigate to Salesforce, and select Nue on Salesforce
Create a quote from an opportunity.
In the Line Editor, set the Start Date and End Date of the quote. For example, 01/01/2023, and 08/15/2023. The Subscription Term on the quote header is calculated as 31.5 Months.
Add a couple of products to the quote. One has Month as the UOM Term Dimension, and the other one has Year as the UOM Term Dimension.
You can see from the image below, the Subscription Term is calculated properly according to the respective UOM Term Dimension.

Proration

Nue calculates proration in cases of Subscription Co-terming, and Subscription Billing.

Subscription Co-Term

In the context of subscription co-terming, proration refers to the process of aligning multiple subscriptions with different start and end dates so that they all expire or renew on the same date. This typically involves adjusting the subscription terms and billing cycles of individual subscriptions to ensure they coincide, allowing for streamlined management and billing of multiple subscriptions within the same billing cycle. Proration helps simplify the administration of co-terming subscriptions and ensures that they are in sync for more efficient billing and renewal processes.

SCENARIO

Customer Sharp Revenue has subscribed to 100 user licenses of VROOM Enterprise bundle product for a year, starting 10/01/2023, ending 09/30/2024.

On 10/18/2023, Sharp Revenue wants to add 10 licenses of Social Media Streaming, co-termed with VROOM Enterprise bundle.

In this scenario, when the sales rep creates a quote for Sharp Revenue, and adds Social Media Streaming co-termed with VROOM Enterprise bundle, she can see that the line item is prorated for the period between 10/18/2023 and 09/30/2024, which comes to 11.43333 months. This is using the Subscription Term Basis US (NASD) 30/360. The total amount is prorated according to the calculated subscription term, which comes to 11.43333 * 100 * $4 = $4573.33

Subscription Billing

In the context of subscription billing, proration refers to the adjustment of subscription fees to account for partial periods. When a customer subscribes or unsubscribes from a service in the middle of a billing cycle, proration ensures that they are charged or refunded only for the portion of the service they actually used during that period. Proration is a fair way to align billing with the actual duration of service and is crucial for accurate and transparent subscription billing.

Let's continue with the scenario above.

SCENARIO

Customer Sharp Revenue has subscribed to 100 user licenses of VROOM Enterprise bundle product for a year, starting 10/01/2023, ending 09/30/2024. Sharp Revenue is on Quarterly Billing. On 10/01/2023, when the initial order is created that generates subscription for VOOM Enterprise bundle, the the first invoice is already generated and activated.

On 10/18/2023, Sharp Revenue wants to add 10 licenses of Social Media Streaming, co-termed with VROOM Enterprise bundle. Sales Rep creates a quote, which converts an order when the upsell opportunity is Closed Won. When the order is activated, an invoice is created for the new subscription Social Media Streaming.

Given that there are the following billing parameters:

The subscription starts on 10/18/2023;
Sharp Revenue is billed Quarterly (Billing Period = Quarterly);
Sharp Revenue's Billing Cycle Start Date is 10/01/2023 since it is configured to align with the first subscription VROOM Enterprise;
Billing proration is enabled at the organization level, which means that the first partial period will be prorated and invoiced, instead of being rolled into the next billing period.

Nue Billing Accelerator determines that we need to generate the first invoice of Social Media Streaming subscription in the following period: 10/18/2023 - 12/31/2023. This comes to 2.43333 months. So the total amount of the invoice item generated for this subscription is: 2.43333 * $4 * 100 = $973.33

Putting It Altogether

This article discusses the concepts of Subscription Term Basis and Prorations in the context of subscription-based businesses.

Subscription Term Basis: This is a critical factor in calculating the duration of a subscription based on the start and end dates. It's used in various stages of the revenue lifecycle, from quoting to billing. There are five different options for Subscription Term Basis in Nue, each aligned with Excel's YEARFRAC function. These options include methods like US (NASD) 30/360, Actual/Actual, Actual/360, Actual/365, and European 30/360. The choice of method depends on industry standards and regulatory requirements.
Setting It Up: You can configure the Subscription Term Basis for your organization by accessing the settings in the Nue App. Once configured, it affects calculations in the Line Editor, helping you calculate subscription terms accurately.
Proration: Proration is used in two scenarios – Subscription Co-term and Subscription Billing.
- Subscription Co-Term: Proration aligns multiple subscriptions with different start and end dates to expire or renew on the same date. This simplifies management and billing of multiple subscriptions within the same billing cycle.
- Subscription Billing: Proration is used to adjust subscription fees when a customer subscribes or unsubscribes in the middle of a billing cycle. This ensures that they are charged or refunded only for the portion of the service they used during that period.