Prepaid vs. Postpaid
Prepaid and postpaid describe when a customer pays in relation to consumption: before using a service (prepaid) or after using it (postpaid).
Billing
Explanation
Prepaid models: The customer buys credits, tokens, or a balance in advance and consumes it over time. Examples include prepaid usage credits for cloud services, learning platforms, or communication services.
Postpaid models: The customer uses the service first and is billed afterwards, typically at the end of a billing cycle based on actual usage.
Many businesses combine both – for example, a prepaid base commitment with postpaid overage charges.
Why It Matters
The two models lead to different contract balances:
• Prepaid: payment received before performance creates a contract liability. Revenue is recognized as credits are consumed. Unused credits that are not expected to be redeemed (breakage) require estimates under ASC 606 and IFRS 15.
• Postpaid: performance occurs before billing, which may lead to unbilled revenue or contract assets at period end.
Billing and revenue systems must track balances, consumption, and expiry consistently.
Related Terms
Contract Liability · Unbilled Revenue · Usage-Based Billing · Minimum Commitment
Related Articles
• Subscription and Usage-Based Billing: Key Design Decisions
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