Prorated billing refers to the technique of charging your customer only for the period they have used your service or product. This form of billing is very relevant for SaaS or subscription model businesses. But, what makes it stand apart from the other traditional styles of billing? In a subscription business model, the revenue stream, and orders are recurring in nature. When a customer signs up for a subscription, they agree to pay a particular amount at a regular interval in return for using a product or service.

The billing amount depends on the plan the customer has subscribed to and the length of time they are subscribed to it. In the usual scenario, the customer remains subscribed to the same plan and makes the recurring payments accordingly. But the billing becomes a little challenging when the customer decides to switch plans or make other tweaks before the next billing date. In such cases, the billing amount has to be calculated based on the number of days under a particular plan - in other words, on a proportional basis. This is what is known as prorated billing.