Do you ever review your credit card (or debit card, or whatever) and see a charge for a product or service you either (a) hardly (if ever) use or (b) signed up for eons ago and never cancelled, simply because the hassle of cancelling is far greater than the cost of keeping the service/product/whatever?
For most US consumers, the above situation is a reality of life — and try as we might, we still get suckered in with “Free 30 Day Trial” or “SAVE 90% on your first order” or “The first X on us” messaging. Not to mention the hyper-targeted digital ads following us around the internet, reminding us of the incredible offer that is just a click away.
So we sign up, put in our credit card information, and tell ourselves that we will definitelyremember to cancel before the trial period expires. But deep down, we know we won’t. Why? Because the cancellation process is absolutely miserable (usually involving hours on hold, multiple representatives and confusing processes), there’s usually a penalty for doing so (an “early termination fee” or something along those lines), and we’re busy living our lives (and signing up for the next incredible offer).
This creates a perverse incentive model from a marketing standpoint – because we (a) know everything above and (b) are therefore focused exclusively on getting a prospect “to sign on the (virtual) line which is dotted,” (to quote Glengarry Glen Ross) — instead of doing what we *should* (namely, delivering value to the customer).
And once the customer does sign up, the incentive isn’t to delight them or deliver additional value — it’s to avoid hatred. To avoid angering customers/clients to the point where they are willing to persevere through the hurdles placed between them and cancellation. That philosophy is diametrically opposed to what truly exceptional marketing – and truly exceptional companies – should do.
There are dozens of examples of companies with this type of revenue model: get customers in with an “introductory” offer, automatically up-sell them to a “standard” monthly/quarterly/whatever plan, then make it so convoluted, difficult and annoying to leave that most will stay around, long after the utility derived from the business is gone. Bonus points for “locking in” or refusing to refund money already paid to the service/platform, so customers lose it if they leave.
ZIP-TIE BUSINESS MODELS
I’ve (not so) affectionately refer to these as zip-tie business models — enticing and easy to get into at the beginning, but near-impossible to back out of once the customer doesn’t want or need it anymore.
Companies like this have existed for as long as I can remember (who among us hasn’t paid for a magazine subscription we didn’t want or a service we used exactly once?) — but they used to be somewhat contained within a side “corner” of the economy. It was a business model used by magazines and beauty products, not “real” companies. It wasn’t a staple of the modern economic ecosystem.
But, a few years ago, that changed. And it changed in a big way. Online-only companies using this model started popping up offering everything from food delivery to clothing to gaming to personal hygiene to gaming and tech. What’s even stranger is that companies employing this business model started receiving massive amounts of VC funding – and commanding substantial exit multiples. That begs the question of what changed?
DOLLAR SHAVE CLUB (DSC)
Not to pick on anyone in particular, but an inflection point in this cycle seems to be the acquisition of Dollar Shave Club by Unilever for a (reported) $1B price tag — which was roughly 5x the company’s 2016 revenues of $200M. Before that, DTC e-commerce companies were going for a 1x-2x revenue multiple (Zappos in 2009 for 2x is a prime example). But then DSC happened. And things haven’t been the same since.
So, what happened to allow DSC to command a multiple well in excess of what other CPG companies had to that point? What changed?
A few things come to mind immediately:
- The use of hyper-targeted digital advertising allowed DSC to acquire customers at scale without traditional advertising investments
- The recurring revenue model increased re-purchase rates
- Barriers to exit (the zip-tie business model) reduced customer churn and increased customer lifetime value to a level well in excess of the customer acquisition cost
While one *could* make the argument that the men’s shaving industry was a bit stodgy and ripe for disruption (Gillette was (and still is) the 800-pound gorilla dominating the market), DSC wasn’t necessarily offering a better product or a better consumer experience. It certainly offered increased convenience to its subscribers (vs. having to remember to buy the razor blades at the grocery store or pharmacy) — but other than not having to think about getting razor blades, the advantage isn’t immediately obvious.
But this acquisition fueled the companies just like DSC in every conceivable industry – from beauty to clothing to meal prep to sportswear to gaming and beyond. In fact, it is difficult to think of an CPG-related industry where this type of business model isn’t at least offered.
IMPACTS ON MARKETING
This change in the economic landscape coincided with a dramatic shift in the marketing landscape. Under the “old” CPG model, companies had to continually “win back” the loyalty (and the dollars) of their consumer usually through on-going, hyper-emotive campaigns. Brand loyalty was there (and in some instances, it was quite powerful), but companies were still beholden to traditional advertising to create demand and prime in-store placements to convert that latent demand into actual revenue.
In today’s ecosystem, this type of customer-centric marketing is less important — the goal is a quick conversion through direct-response online marketing. This is a task for which social platforms like Facebook, Instagram and Twitter are ideal — ads can be customized and micro-targeted to individuals based on their preferences, style and online behavioral history, which (paradoxically) lowers costs while increasing conversion rates.
And once the customer is signed up, marketing virtually disappears — after all, there’s no need to remind consumers of the fact that they are being charged each month for a service/product they (probably) aren’t using.
CALIFORNIA SENATE BILL 313
And here’s where CA SB 313 comes in, which went into effect on July 1, 2018. This piece of legislation addresses many of the glaring issues with the Zip Tie business model and creates a more consumer-friendly environment by requiring that companies:
- Provide a “clear and conspicuous” explanation of the price and terms that will be charged following the initial offer, including an explanation of when future charges will occur
- Obtain the consumers’ consent before charging an automatic renewal to a credit card (or other payment method)
- Provide an “exclusively online” cancellation for any subscription or recurring charge
- Enable the customer to cancel before any future charges
What’s more, CA SB 313 applies to ANY company that has ANY customers who are located in the state of California, which makes the law applicable to virtually every company described above.
While we have yet to see the long-term implications of this law, there are a few initial conclusions that we can draw:
- Post-conversion marketing will become more important than ever for companies with recurring revenue business models — after all, if the friction preventing cancellations is eliminated, users are more likely to take advantage unless they believe they are receiving value from their investment
- A cottage industry that helps individuals cancel unwanted or unnecessary recurring cost subscriptions is likely to continue to emerge
- More states are likely to follow CA’s lead on this — and some lawsuits are likely to result when companies inevitably fail to comply. The outcome of those lawsuits will likely determine future compliance from other companies