So, folks before I do the 4th part on the exceptions to the CPQ Price Waterfall, I wanted to cover the topic of Prorated pricing and how it is calculated in the Salesforce CPQ and it’s impact on Price Waterfall and on renewals. If you want to read more about Salesforce CPQ, you can read it here and follow the series. If you want to read more about exceptions to the Price Waterfall, then you can read it here and follow the series.
What is Prorated Pricing?
To understand Prorated pricing, we should look at the list price first:
- Standard List Price – List price is the standard, original, first price of the product. It is entered in the Price Book.
- Prorated List Price – When List price is for a time period or when list price is for a collection of products and it is reduced due to usage of the product for a shortened time period then it can be called as Prorated List price
- Car rental example – Let’s say a car is rented for $750 for a month. List price for a monthly subscription of the car becomes $750. Usually car rental providers will charge a much higher amount and a different list price on daily and weekly basis. Now, if someone wants to use the monthly subscription only for 2 weeks and pay for only 2 weeks then in special circumstances the $750 price can be prorated accordingly. So, for 2 weeks usage, the price becomes $375. 50% Proration. You will notice that in this case the proration has happened on the list price.
- Lunchbox box example – All my blogs have been based on Lunchbox example. Let’s assume that Tango Foods a food company has introduced a monthly subscription for the delivery of Lunchboxes. The monthly subscription cost is $300 dollars. In this subscription 24 lunchboxes are delivered over a period of 4 weeks, once every week. Now, if some wants to get this prorated and wants to use just one week of this service then Tango Foods can consider prorating it by 75% as only one week is used and charge a price of $75 dollars. This can also be bumped up if used as a special scenario.
How to set up Prorated Pricing? (Basis of Proration)
Let’s quickly see how the prorated pricing works in the Salesforce CPQ system. In order to set up Prorated pricing, following fields play an important role. Another point to note here is that we will be mostly discussing the Prorated pricing based on Subscription pricing model in Salesforce CPQ.
- Subscription Term Unit – This is a one-time configuration setting and the basis for subscription pricing. The setting options are Month and Day. The value here will directly impact the subscription term on the product and on the quote. For example, if the subscription term unit is ‘Day’ and if a product is priced at a yearly subscription then the value in the subscription term on the product will be 365. If the subscription term unit is Months, then the subscription term value for an yearly subscribed product will be 12. If you want to know more about subscription pricing then you can refer my blog here.
- Prorate Precision Multiplier à This is an especially important configuration setting which defines the precision of proration. This setting will clearly define if the proration is required based on month or days. For example, if on a yearly subscription if the proration is for a period of 200 days then it is 6 months and 20 days. It depends on the nature of the product and subscription and the objective of the company if they want to charge only based on 6 months or 200 days or 6 months and 20 days. This is a onetime setting based on the objective of the company and should be treated while designing the solution.
- Subscription term on the product – This is a field on the product object and defines how long the product is going to be subscribed for.
- Subscription term on the Quote à This is a very important field on Quote line object, and this will represent the time for which the proration has to happen. This is negotiated subscription term on which the pricing has to be based. I have covered this in my subscription pricing blog and it’s link is give under Subscription Term Unit in this section.
Prorate Pricing Calculations and their impact on Price Waterfall
Let’s understand this with an example, Tango Foods is offering a one-year subscription of Lunchboxes. The list price of this yearly subscription is $2000. In this subscription customer will be offered 24 lunchboxes in a month, 6 every week. There is a system discount of 10% for 2-5 subscriptions. There is an additional discount of 10%. A partner discount of 5%. A few customers want to try this subscription for 100 days so from 1st August 2020 to 10th Nov 2020. Tango foods has to implement Prorated pricing for the same. The subscription term set in the system is Month. Let’s see the calculation of prorated pricing for the same for 2 subscriptions.
- Prorate Precision-Day – Let us first calculate the Prorated list price based on this setting and then we will derive the CPQ Price Waterfall. Since the subscription term unit is Months we take the days from 1st Aug, 2020 to 31st July, 2021 as the base term in days. Since 2020 is a leap year, we will consider 366 days. So, 100 divided by 366 is = 0.273 * 2000 = $546.44. The prorated List price will become $544.44. We will calculate the CPQ Price waterfall on this price.
- Prorated List Price is = $546.44. Total Prorated List price for 2 subscriptions is $546.44 * 2 = $1092.88
- Regular Price is = $546.44 minus (10% of 546.44) = $491.8. Total Regular Price = $491.8 *2 = $983.6
- Customer Price is = $491.8 minus (10% of 491.8) = $442.62. Total Customer Price is $442.62*2 = $885.24
- Partner Price is = $442.62 minus (5% of 442.62) = $420.49. Total Partner Price is $420.49 * 2 = $840.98
Net price in this case for 2 yearly subscriptions for 100 days with prorated list price is $840.98.
- Prorate Precision-Month – Now, let us calculate the Prorated List price based on the Prorate Precision Month setting ‘Month’. The difference here from the ‘Day’ setting is that whole months are considered for Proration. Days are not considered. So for example if the proration is for 100 days then 4 months will be considered as 90 days is = 3 months and the balance of 10 days will be rounded off to one more month so the proration will be based on 4 months. The prorated per unit list price in this case will be (4 divided by 12) * 2000 = $666.66. The total Prorated per unit price will be $666.66 * 2 = $1333.28
- Prorated List Price is = $666.66. Total Prorated List price for 2 subscriptions is $666.66 * 2 = $1333.28
- Regular Price is = $666.66 minus (10% of 666.66) = $600. Total Regular Price = $600 *2 = $1200
- Customer Price is = $600 minus (10% of 600) = $540. Total Customer Price is $540*2 = $1080
- Partner Price is = $540 minus (5% of 540) = $513. Total Partner Price is $513 * 2 = $1026.4
Net price in this case for 2 yearly subscriptions for 100 days with prorated list price is $1026.4.
- Prorate Precision- Month+Day – Let’s calculate the prorated price with prorate precision set to Month + Day. This setting is different from the above 2 settings in a way it is taking into account the Months and days for Proration. So for the proration period of 100 days, the formulae will be (Whole months(not rounded) + parital days divided by 365/12) divided by 12à So, 90 days form 3 months + Balance 10 divided by (365/12)= 3.32 and then 3.32 divided by 12 = .27 (prorate factor). Prorated price will be 2000 * .27 = $540. The prorated list price in this case will be $540 and the total prorated list price $540 * 2= $1080.
We can calculate the Net price from here and in this case it will slightly less then the price with Prorate precision setting Day.
- Summary – Upon using the above 3 methods we have seen that the most beneficial method for the Company is the Prorate precision with Month as the prorate list price and Net price comes out to be the highest in that. The most precise of the above 3 settings could be the Month + Day setting which is taking into account both Months and days. The choice of the method depends upon the goals of the client, the policy towards prorated pricing in general and other factors.
Proration of Additional discount and it’s impact on Price Waterfall
We will see it in next blog.
Effect of Proration on Renewal:
- Same – In case of renewal with the ‘Same’ renewal method, the Prorated list price of he renewed quote is copied to the corresponding renewal quote. The Regular and the Customer Unit in the renewal quote is calculated on the basis on this Prorated price. Partner and Distributor discounts are not copied over to the renewal Quote.
- List – In this case the List price will be carried over from the applicable list price entry available in the pricebook at the time of the renewal. Now if at this time the prorate precision is set and the other conditions are fulfilled then proration will again be done based on the conditions. Regular discount will be appropriately calculated but Additional and channel discounts will not be carried to the renewal quote
- Uplift – This will work in the same way as the ‘Same’ method except for it will additionally apply the uplift % on the customer price.
If you want to know more about renewal pricing then you can read it here.
I hope that I have been able to throw some light on the concept of Prorated Pricing. This is especially important and practical because most of the time we are dealing with prorated scenarios. Your likes, comments and shares will motivate me to keep writing. See you with my next blog on 4th Part of CPQ Price Waterfall exceptions.