SVP, General Counsel & Data Compliance Officer
For most experienced marketers negative option contracts are nothing new.
Traditionally the contract of choice for magazine subscriptions and continuity marketers, negative option deals today are enjoying a renaissance. Auto-renew offers are being used in emerging businesses ranging from subscription boxes to popular media services like Netflix, all manner of new information and services businesses, and even auto-shipped consumer packaged goods. Typically the consumer receives the first month (or months) free or for a reduced price, and a credit card is automatically charged at the full rate each subsequent month until the consumer cancels the subscription.
Perhaps unsurprisingly, the growing popularity of negative option contracts has provoked increased scrutiny from lawmakers and regulators.
Many of the new regulations focus on ensuring that merchants do not use unfair or deceptive advertising or contract language. Recent national legislation such as the Electronic Funds Transfer Act and the Restore Online Shoppers’ Confidence Act specifically focus on “clear and conspicuous” disclosure requirements.
Alliant DataHub Members should also be aware that state laws add layers of complication. California began regulating trial periods and continuity plans in 2017, with other states passing similar laws requiring specific disclosures in subscription offers. A new District of Columbia law mirrors other states’ “clear and conspicuous” disclosure requirements, and also requires highly detailed notifications prior to subscription renewals and affirmative consent before charging a customer following a free trial.
Interestingly, new rules are being introduced in the supply chain too. Starting in April 2019, MasterCard will require merchants to receive explicit authorization to begin recurring payments at the conclusion of a subscription trial period. These regulations benefit consumers by reducing confusion and unexplained monthly charges — but they pose consequences for marketers if they are missed.
Taken as a whole, many of the new rules are just restatements of best practices and good customer service. Consumers should understand what they are getting into. Credit card charges should be easily attributed to the marketer. And there should not be large delays between the charge and the delivery of the product.
But changing rules may negatively impact consumers and marketers as well. Consumers like the ease of auto-renewals, and the speed and surprise of subscriptions. The new rules increase friction and raise the overall costs to merchants, which could result in increased prices to the customer. Finally, rules that are too onerous may cause companies to end their free trial periods entirely, which hurts consumers seeking new products with low initial risk.
If your organization is seeking to attract new consumers for a monthly subscription, you may want to consult qualified counsel about what changes you may need to make on your offer and contract.
Additionally, it may be in your interest to reevaluate your audience targeting strategies. You can make data work for you with models that find consumers who are more likely to affirmatively renew after a trial period, as opposed to “serial cancellers”. In this respect, Alliant offers a number of solutions designed to help grow your subscription business profitably — even with increasing legal requirements.