Do you remember Colombia House’s offer of eight compact discs (or 12 records or tapes) for a penny? If you’re 30 years or older, you probably do, since their perforated sign-up cards seemed to adorn the middle of every magazine for a couple of decades. And most of us probably signed up for their offers at least once.
At their high point around 1991, bolstered by the release of music CD’s, they had reached 10 million members, or just shy of 4% of the U.S. population! Looking to cash in on Colombia House’s ultra-successful business model, BMG, or the BMG Music Group, emerged as an alternative. As recently as 2000, both companies grossed about $1.5 billion a year in sales. Book-of-the-month clubs, DVD and Blue Ray clubs, and magazine subscription services soon followed the trend.
So how the heck did they make money by practically giving away music? The original offer was just to hook new members of course, and once in, they were subject to a practice called “negative option billing.” Your original 8 CD’s were mailed to you as promised, but from there you were on the hook for monthly shipments of new music (at full price) unless you expressly told the club you didn’t want them. Of course, not one paid attention to this part, and soon the confusing bills started piling up as fast as your collection of unwanted music.
In fact, Colombia House was on the forefront of negative option billing, hoodwinking millions of people but skirting the law on their way to a fortune. But instead of being outlawed since the 90s, negative option billing has actually expanded and flourished, especially with the advent of the Internet and online credit card billing.
How does it work? Instead of a company or individual trying to sell you a product or service the traditional way, where you say yes, and then payment ensues, negative option billing starts out with an assumed yes. Consumers receive offers for free signups, trial offers, sample gifts, and introductory bonuses. Once the customer agrees to that supposedly free or low-cost offer, they are on the hook, even without realizing it. Companies either completely fail to disclose their terms or make it almost impossible to decipher the small print. Little do they know, but the consumer starts getting charged to their credit card, even though they haven’t agreed to anything in principle but the free starting offer. The charges may come all at once or as a monthly trickle.
Once you are signed up, the companies intentionally make it extremely difficult – if not borderline impossible – to successful opt out and stop receiving goods or services, and halt charges. But by the time the consumer A) realizes they’re being charged, B) navigates whom is charging them and why, and C) gets in contact with someone at the company D) gets resolution on what happened and cancels, a lot of time and even more money go by. A good portion of consumers don’t realize they’re even being billed for years, and by then, it’s too late.
Of course, companies do this because they get a tidal wave of customers automatically enrolled in their services with this marketing tactic.
Research shows that if a company solicits a customer to sign up for their product or service, probably only 15% or less of consumers will enroll (and that’s being extremely generous.) However, if consumers are lured with negative option billing methods, upwards of 80% of those solicited will sign up. The windfall for these companies is ridiculously lucrative.
And with the advent of the Internet and social media, it’s easier than every to drive traffic and attract tens or hundreds of thousands of people to a website to click on a free offer. They often say there is no charge for the free gift or starting offer but then take your credit card information anyone. Another method of doing this is that companies send people a check for a nominal amount, like $2.000, or a free coupon. But once the consumer cashes that check or uses the coupon, the fine print stipulates they are subject to monthly charges for junk products or services. Tricky, huh?
But why negative option billing even allowed? The practice is deemed unethical at best, and more commonly illegal. And the laws clearly state that when there’s a dispute or a complaint, the burden of proof to justify the opt-in lies with the marketer, not the consumer. In Ontario and other parts of Canada, negative option billing was actually outlawed, and in the U.S. the practice is supposed to be heavily regulated by the Federal Trade Commission. But some states, like Michigan, exercise their right to deem it illegal based on their interpretation of the codes. But there is still the gray area of jurisdiction when businesses are not necessarily based in Michigan and doing business via the Internet.
The matter of cleaning up negative option billing still falls with the Federal Trade Commission, who’s efforts to curb it can best be characterized as sticking their finger in bursting dike. Of course, their rhetoric is rock solid, as per this official statement:
“The Federal Trade Commission requires that any club or service offering a negative option plan must clearly and conspicuously indicate minimum purchase obligations, cancellation procedures, the frequency with which members must reject shipments, and how to eventually cancel a membership when they enroll new members.”
And yet, as far back as 2001, the FTC received over 200,000 complaints from consumers who were victims of negative option billing with magazine subscriptions, alone, not to mention the countless masses who were bilked by Colombia House and BMG by that time.
“Negative option marketing is particularly troubling when marketers already have consumers’ credit card or billing account information and can easily charge consumers’ accounts without their permission or when marketers fail to disclose that consumers’ credit card numbers will be transferred to another company and charged unless consumers call to cancel,” the FTCs Elaine Kolish told Congress in November, 2001.
The FTC sued nine companies that year, as well as calling the big music companies on the carpet. But only two years later, the number of FTC complaints had doubled, and since then, little has been done to regulate the practice, which is called “advance consent marketing” by those companies and industries that use it. The FTC and consumer advocates appealed to congress for help in cleaning up the industry…but no help was forthcoming. So how can consumers be identify and avoid negative option billing? Quite simply, don’t give your credit card to anyone on the Internet who’s not a large, recognizable and credible vendor.
Be wary of the aforementioned free, introductory, sample, and trial offers, The industries that currently use negative option billing the most include magazine subscriptions, weight loss products and services, gym memberships, adult sties, dating sites, and online financial services.
Check your bank and credit card account statements thoroughly every month (you should do this anyway). If you see a questionable charge, don’t bother calling the creditor listed, as it’s usually difficult to get through to talk to someone or any resolution. Instead, call your credit card company or bank and talk to them about the charges or file a dispute. It’s also a good idea to use your credit card when purchasing anything on line as there’s a lot more recourse for fraud or errors than if you use your debit card, where someone could clean out your bank account. And if things are really fishy, contact the Department of Consumer Affairs at ConsumerAffairs.com to file a formal complaint.
