How to Calculate a Prorated Refund

Knowing how to calculate a prorated refund is an important skill for many customer service and accounting professionals. Providing an accurate prorated refund to a customer can save time and improve customer satisfaction. This comprehensive guide will explain what a prorated refund is, when it’s used, and walk through the steps to calculate it properly.

What is a Prorated Refund?

A prorated refund refers to a partial refund that is calculated based on the time remaining in a service period or contract. For example, if a customer purchases a 1-year software subscription in January but decides to cancel in April, they may be eligible for a prorated refund for the remaining unused months of service.

The refund amount is prorated, or divided proportionally, to account for the time the customer did use the service. The customer does not receive a full refund, but rather a portion back based on the unused time remaining.

When is a Prorated Refund Used?

Common situations when a prorated refund may apply include:

• Early contract cancellation: When a customer cancels a yearly service, event ticket, or membership before the full term is over. The refund accounts for unused time.

• Upgrading a subscription: When a customer upgrades from a cheaper to more expensive subscription mid-billing cycle. The refund prorates the difference in plan costs.

• Downgrading a subscription: When a customer downgrades from a more expensive to cheaper subscription mid-billing cycle. The refund prorates the difference in plan costs.

• Partial month billing: When billing monthly for a service that a customer used for only part of the month. The bill prorates based on days used.

• Early termination fees: If a contract requires a customer to pay an early termination fee, it may be prorated based on time remaining.

• Business closures: Businesses may provide prorated refunds for any unused services due to temporary closures.

• Partial usage refunds: For consumption-based services like cloud storage or hosting, refunds may be prorated based on usage.

How to Calculate a Prorated Refund

Calculating a prorated refund involves two basic steps:

1. Calculate the per day or per unit refund value.

2. Multiply the per day/unit value by the number of days/units remaining.

Let’s walk through an example:

Customer purchased a 1-year subscription on January 1st for $1200. They decide to cancel on April 15th. The business offers prorated refunds on early cancellations. How much should the customer be refunded?

Step 1) Calculate Per Day Refund Value

First, we need to determine the per day dollar value of the subscription:

• Subscription was $1200 for 1 year (365 days)
• $1200 / 365 days = $3.29 per day

This means each day of service is worth $3.29 for this subscription.

Step 2) Multiply by Unused Days

Next, we calculate the days remaining in the term that were unused:

• Subscription started January 1st
• Customer canceled April 15th
• January 1 to April 15 is 105 days used
• 365 total days – 105 days used = 260 unused days remaining

Now multiply:

• 260 unused days x $3.29 per day value = $855.40

Therefore, the prorated refund amount this customer should receive is $855.40.

Prorated Refund Calculator Tools

Manually calculating prorated refunds for multiple customers can be tedious. Fortunately, there are various free online prorated refund calculator tools available to automate the math:

• Prorated Refund Calculator from Blaze – Allows inputs for amount, dates, and term length. Computes the prorated refund owed.

• Prorate Calculator from Shopify – Shopify’s free tool tailored for ecommerce refunds.

• Prorated Calculator Template from JotForm – Simple automated calculator form that does the math.

• Excel formulas – Excel has pre-built formulas like =DAYS360 and =EDATE to calculate days between dates and add time ranges.

These tools remove the manual work of calculating prorated values and refunds for each customer request. Simply plug in the amounts and dates, and the tool runs the formulas automatically.

Prorated Refund Formula

For those who prefer to calculate prorated values entirely by hand, here is the basic formula:

Number of Days Used / Total Days in Billing Period = Percentage UsedFull Price x Percentage Used = Used ValueFull Price - Used Value = Prorated Refund Amount

You can also convert this to a one-step formula:

(Full Price / Total Days) x Unused Days = Prorated Refund Amount

This allows you to plug the numbers right into the formula to compute the refund due.

Handling Monthly Prorated Refunds

The examples above use a 1-year subscription for simplicity. But prorated refunds also apply to monthly subscriptions. The process is the same:

1. Calculate per day value

2. Multiply by unused days

The only difference is that for a monthly subscription, you’ll want to be sure to calculate month lengths accurately.

For example:

Customer purchased a monthly subscription on March 11th for $10/month. They decide to cancel on April 20th. Assuming 30 days per month, what is the refund?

• March 11 to March 31 = 21 days
• April 1 to April 20 = 20 days
• So they used 21 + 20 = 41 days
• Each month is assumed to be 30 days
• So they used 41 out of 60 total days
• $10 monthly fee / 30 days = $0.33 per day
• 60 total days – 41 days used = 19 unused days
• 19 unused days x $0.33 per day = $6.27 refund

Being aware of variable month lengths is important for accurately prorating monthly subscriptions day-by-day.

Prorated Refunds for Usage-Based Services

Services that bill based on usage like cloud storage, hosting fees, or metered billing require a different approach to prorated refunds.

Instead of prorating by days, you prorate based on the proportional usage.

For example, a cloud storage provider offers 500 GB of storage for $50/month. A customer used 300 GB of the 500 GB before cancelling mid-month.

• Customer used 300 GB of the 500 GB total
• So they used 300/500 = 60% of the service
• Monthly price is $50
• 60% of $50 is $30
• So prorated refund would be $50 (full fee) – $30 (proportional usage) = $20

The usage amount takes the place of “days used” in the standard prorated refund calculation.

Prorating Refunds for Tax

One special consideration with prorated refunds is whether tax should also be prorated. Typically, refunding the pre-tax amount is simpler:

1. Calculate prorated refund on pre-tax subtotal
2. Refund full tax amount separately

However, some businesses choose to prorate tax as well. This involves:

1. Calculating tax percentage paid (Tax Paid / Pre-Tax Subtotal)
2. Prorating refund on pre-tax subtotal
3. Applying tax percentage to prorated refund amount

Check your accounting practices to determine the appropriate way to handle tax on prorated refunds.

Best Practices for Prorated Refunds

Follow these best practices when processing prorated refunds:

• Disclose prorated refund policy upfront before purchase
• Use consistent time increments (days, months, hours)
• Refund via original payment method
• Automate calculation using a prorated refund calculator tool
• Send email confirmation with refund details to customer
• Double check dates and amounts before processing
• Issue refund quickly after cancellation request

Providing fast, accurate, well-communicated prorated refunds will improve customer experience and reduce calls to customer service.

Frequently Asked Questions

What if a customer cancels mid-month? How is that prorated?

For a mid-month cancellation, calculate the prorated refund based on unused days remaining in the month using the steps above. Refund a proportional amount for the partial month.

Do I have to offer prorated refunds?

Unless required by law, prorated refunds are an optional customer service policy. Many companies choose to provide them as a courtesy to customers canceling mid-term.

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