Credit Proration

Credit proration for subscriptions involves adjusting charges or providing credits to subscribers based on the remaining time in a billing cycle when changes are made to their subscription plan. This process ensures subscribers are billed accurately for the portion of the subscription they have used or are entitled to.

 

It is common for subscription-based businesses to prorate credits for subscriptions. With Nue, you can easily prorate credits issued to a customer if they make changes to their credit burndown subscriptions before the billing cycle ends.

 

How Credit Proration Works

 

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SYSTEM SETTING REQUIRED   You must enable the following system setting at the organization level:    Enable credit proration for partial periods

 

When you subscribe to a credit burndown subscription, credits will be issued for each term. If credit proration is not enabled, you can only modify your subscription for the entire term. For instance, if you have a 12-month credit burndown subscription and wish to reduce the term, you can only do so by ending it at the end of any month.

 

With credit proration enabled, you are allowed to make mid-term changes to a credit burndown subscription, the unused credits will be prorated and refunded in the next billing cycle. The prorated amount of credits will be calculated based on the date that the subscription's term ended and the usage of those credits issued within the term.

 

Credit Proration Scenario

Now let's take a look at a scenario. A customer has bought a yearly based credit burndown subscription for $2,400. This subscription includes 240 credits at a unit price of $10, with an average of 20 credits per month. The subscription starts on 01/01/2023, and ends on 12/31/2023. However, on 10/01/2023, the customer decides to co-term (cancel or reduce the term) the subscription and receive a refund for any unused credits within the canceled 3 months.

 

Prorated credits refer to the portion of credits that remain unused in the canceled subscription period. In this case, it will be the amount of unused credits between 10/01/2023 and 12/31/2023. There are various scenarios where the use of credits may differ based on consumption:

 

Scenario 1: 150 credits have been consumed out of the total of 240, 90 credit balance left

Prorated Term	Prorated Credits	Refund / Charge
3 Months / 12 Months = 0.25 Year	0.25 x 240 = 60 Credits	$10 x 60 = $600

 

Scenario 2: 200 credits have been consumed out of the total of 240, 40 credit balance left

Prorated Term	Prorated Credits	Refund / Charge
3 Months / 12 Months = 0.25 Year	40 Credits (The credit balance is smaller than 60)	$10 x 40 = $400

 

Scenario 3: 250 credits have been consumed, 10 overage out of the total of 240, 0 credit balance left

Prorated Term	Prorated Credits	Refund / Charge
3 Months / 12 Months = 0.25 Year	0 Credits (No credit balance left)	$10 x 10 = $ 100 (Additional charge for overage)

 

Let's go through the scenarios mentioned above in Nue:

Create yearly credit burndown subscription

• Set up a credit burndown product 'Credit Annual Package' with the standard price of $10 / Credit
• Create an order in Nue on Salesforce for the customer and activate it

 

• The customer now has 240 credits in their balance

Prorate credits for mid-term changes

In the customer lifecycle manager, when you reduce the term of a credit burndown subscription by making a term-reduce, co-term, or subscription cancellation change, the unused credits issued will be prorated and canceled for partial terms accordingly, if the 'Enable credit proration for partial periods' setting is turned on. 

 

• Reduce the term of subscription 'Credit Annual Package' for 3 months
• After checking out the changes to a change order, the prorated credits will be calculated in the change line and the total amount of the change order will be determined by the prorated credits.

 

• Now if you go to the customer lifecycle manager, you can see the prorated credits are deducted from the customer's credit balance.

 

Refund for the prorated credits

Since the customer has already paid for all the issued credits, the prorated credits will be refunded in the next billing cycle:

 

• A negative invoice will be generated in the next billing cycle after the billing schedule job is executed, then the customer will get the refund accordingly.

 

• If the customer has overage usage of the credits, the prorated credits will be zero, and they won't receive a negative invoice. Instead, they will be charged for the additional amount in a new invoice that reflects the overage usage.

 

For more information about how credit burndown works, please refer to this article.