Ever tried to cancel a gym membership and found it impossible? Maybe you had to go down to the gym to do it in person, so you could be shamed by not going to work out. But that would be difficult if you forgot to do it before you moved away and the gym wasn’t close by.
The Federal Trade Commission has proposed a new rule that would make it easier for consumers to cancel subscriptions.
Let’s take a look at the proposed rule and how it affects your business!
What is Negative Option Marketing?
In negative option marketing, companies take consumer’s “silence, or failure to take an affirmative action, as acceptance of an offer.” Basically, if you fail to tell the company that you want to cancel the subscription, they will automatically renew it.
Some of the examples that the FTC uses:
- Consumer agrees to receive periodic shipments of goods or provisions of services – bottled water delivery
- Automatic renewals of subscriptions – magazine subscriptions, credit monitoring service
- Free trials convert to paid subscriptions
Currently, the FTC Negative Option Marketing Rule only applies to prenotification plans (the product of the month type products). Under the Rule, sellers must disclose:
- How subscribers must notify the seller if they do not wish to purchase the selection
- Any minimum purchase obligations
- The subscriber’s right to cancel
- Whether billing charges include postage and handling
- That subscribers have at least 10 days to reject selection
- That without the 10 days, the seller will provide a credit
- The frequency of announcements
Restore Online Shoppers Confidence Act (ROSCA)
In 2010, Congress passed the Restore Online Shoppers Confidence Act (“ROSCA”) to address some of these problems in the online world.
For online subscriptions, the business must clearly and conspicuously disclose all material terms before getting the billing information, obtain express consent, and provide a simple mechanism to stop recurring charges.
Is your online subscription service compliant with ROSCA?
Aren’t Contract Auto-Renewals Good?
Most of us think that auto-renewals are good, even beneficial.
As a business owner, it means that I don’t have to spend time re-negotiating contracts. I can make plans and budgets for a year or even more which allows me to invest more into the business. There is some assurance there that there will be a recurring income stream, which makes the company more attractive to investors and lenders.
Contractual auto-renewals are the legal function that makes up the ARR (Annual Recurring Revenue) and MRR (Monthly Recurring Revenue) financial metrics.
From a consumer POV, I know that I have a relatively guaranteed service or product and the price I will be paying for it for that period. I can also make budgets for my personal finances.
The Dark Side of Auto-Renewals
But with every good thing, there is the flip side – the dark side (pun intended as I am writing this on May the Fourth).
How many times have you been hit with an auto-renewal that you weren’t expecting? Maybe it hit your bank account and caused an overdraft? Or now there was a higher cost – hello natural gas and cable providers.
And when you call to get a better price, you are SOL. Or they give you a run-around when it comes time to cancel, making you jump through all kinds of hoops.
I had to mail a paper letter in during the pandemic to cancel my gym membership! I’ve had to spend hours on hold to wait for a customer service rep to cancel a cable subscription, only then to have to go through all the customer retention specialists and their offers of a better, new package.
It’s frankly really annoying as a consumer. But as business owners, we know why they do it – it’s a lot of money at stake here.
And it is worse when it all started with a free trial that you wanted to cancel before being charged.
The Proposed FTC Rule
A reminder that the FTC is only proposing a new rule and has invited businesses and consumers, as well as other interested parties, to provide comments (feedback) on the proposed rule. If you want to provide a comment on the proposal, you must do so by June 23, 2023.
So what does the new proposed FTC rule actually do?
First, the seller would have to disclose, prior to obtaining billing information, any material term which includes (but of course is not limited to):
- That consumers will be charged and on a recurring basis unless the consumer takes action to stop it.
- The deadline by which the consumer must take action to stop the recurring charge.
- The amount that the consumer will be charged.
- The date that the charges will be made.
- Instructions on how to cancel
These disclosures would have to be “clear and conspicuous” which means companies can’t be hiding it all in the small print at the bottom of the page. The disclosures would have to be before the consumer clicks on “add to shopping cart.”
Second, the company would have to get consent from the consumer. This would be unambiguous consent (hello, new checkbox on your checkout page).
There would be a document retention requirement of three years or one year after the subscription is terminated, whichever is longer.
Click to Cancel
Third, there would have to be a simple cancellation mechanism. This is the so-called “Click to Cancel” because the rules require that the cancellation be as simple as the sign-up was.
In addition to the “Click to Cancel” feature on your website, there would also be a requirement that the seller get affirmative consent before offering up a “Save” which is the last ditch attempt of the company to keep the customer on, usually with a different plan or lower price or similar offering. This would also have a document retention requirement of three years or one year after the contract is terminated, whichever is longer.
Reminders About Renewals
Fourth, the FTC Rule would require reminders, at least annually, for subscriptions not involving physical goods. This means all those credit monitoring services, your cable bills, and online subscriptions.
What’s Next for the FTC Cancellation Rule?
When the FTC proposes a Rule, they put it out for comment by interested parties. That’s where we are now – the Proposed Rule was published on April 24, 2023, and the public has 60 days to comment.
After the comment period is up, the FTC will review the comments and decide if they need to make any changes to the Proposed Rule before making it a final Rule. If it becomes a Rule, there will usually be an implementation period to allow businesses to make the changes necessary to conform to the Rule before enforcement actions would begin (ie before they could bring a lawsuit against you).
Tips for Your Business
As a business owner, we love recurring revenue! And right now, subscription models are all the rage with online business owners. From software to communities to templates, the options are out there (I’m even working on a subscription model for my law firm for online businesses!)
I am definitely not going to discourage this business model.
What I will encourage you to do, however, is to think about best practices for your business. It’s always a good idea to be up-front about what you charge and when. Regardless of the FTC Proposed Cancellation Rule, you still have to deal with your customer and the potential that the challenge any charges that you make on their credit cards. Those chargebacks usually come with fees from your credit card processor and a large administrative headache.
Also, by having an easier cancellation “Click to Cancel” process, you reduce the administrative headache of dealing with customers that no longer want to be there. That’s a big emotional drain for a solopreneur or small business owner, having to go through the process of ending a relationship with a customer. (I’ll remind you to not take it personally, but it is hard, being human and having emotions and all)
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