What’s in a month?

(hold on to your shorts, this is both a philosophical and maths question!)

If you’ve been following my last posts, you know my goal has been to provide tips on standardizing metrics to allow our friends in Finance and RevOps to have a little fun in the sun this month.

But when it comes to the final tip of the series, what’s in a month really refers to the number of days and the impact it can have on subscription pricing:

🔥 𝐇𝐨𝐭 𝐓𝐢𝐩 #5: how do you pro-rate your subscriptions?

Customers adding&removing products midway through their yearly subscription is pretty common place.

Typical practice is to “co-term” the new product to the date their original subscription ends. That way, all the product subscriptions renew at the same time.

So let’s say an existing client wants a product that’s typically $5,000/year but their first subscription term is 7/21/2024-03/31/2025. How much do you charge?

Here are just a few pro-ration options and how they change the contract price and therefore ensuing revenue metrics:

➡ By Day: Calculate average cost per day and multiply by number of days in current term. 5000/365 days = 13.69 x 254 days in the irregular term
= $3,479.45

➡ By Month: Just round to the nearest whole month. This term includes 8 whole months + 11 days which brings it to 9 months. 5000/12 = 416.66/month x 9 months
= $3,750

➡ By Month+Day: The number of whole months (8 whole months) + a decimal for the partial month at the end of the term: extra amount of days divided by (365/12). Calculation is then = 5000 x (8 + (11/(365/12)))/12
= $3,484.02.

Even with the same dates and annual value, you get three different costs depending on your proration formula. None incorrect on their own but when this needs to be calculated manually, is everyone following the same method? Should I mention a broken excel calculator here?

🤔 How to account for fluctuating number of days in a month: 30 vs 31 vs 28?
😰 Leap years with 366 days?
😱 What if the client decides to delay the start date by a couple of days?

To wrap up:
As we saw with the other tips (free trials, multi-currency, proration), without a clearly defined and standardized application, pricing will fluctuate from contract to contract creating those nasty discrepancies that keep Finance teams up at night.

So whatever method you decide on, make sure that it’s getting applied consistently and understood by all contract creators… or run the risk that each contributor will identify their own method, leading to manual errors, hours of unnecessary reviews and a lot of headaches! 💊

(BTW – having kick-ass software directly in your CRM to automatically calculate your pricing and adjust for how you prorate will remove the delays and frustrations so your team can deliver quotes and contracts with accurate pricing every time…
Ask me how I know 😎)

Happy calculating folks and if you need a solution to turn theory into practice on any of these tips, you know where to find me!