The following is a contributed piece from Krish Subramanian, co-founder and CEO of subscription billing and revenue management company Chargebee. Opinions expressed are author's own.
Subscription business models are booming, and so is the negative option — a good thing, if done correctly.
The negative option is a billing practice in which silence equals consent. It’s a convenient way for both companies and customers to get what they want. When the initial billing period ends, customers maintain their subscription without having to renew, and companies get their revenue without incurring new administrative costs. But, when used in bad faith, it can give the subscription industry a black eye.
As The Wall Street Journal has reported, the Federal Trade Commission is looking into allegations that some subscription companies are using the negative option to snag customers and, in some cases, make it hard for them to cancel, using confusing and ambiguous language in their terms of service and imposing onerous cancellation and refund processes.
Negative practices like these obscure the value of subscription pricing, which, when done in a transparent and above-board way, helps both sides of the transaction get what they want efficiently and cost-effectively.
Fast growing model
In 2021, 2.2 billion subscriptions will create a global industry of almost $228 billion, 31% higher than the $174 billion generated in 2020. By 2025, the market is expected to have a turnover of more than $481 billion, with an average year-on-year growth of 23%.
Subscriptions used to be thought of mainly as the cornerstone of the typical software-as-a-service (SaaS) platform, but now they are starting to define the world. From beauty products and murder mystery games to mobile hangover treatments, everything now can be a service, enabling small businesses such as the pet shop down the street to compete with a big business like Chewy.com.
Because nearly every business can implement a subscription offering and billing structure, there has never been a better time to start a business or try a new business model. The subscription model offers businesses low barriers to entry and better customer experiences via personalization, convenience, and frictionless service and payment.
Silence should not equal consent
Which brings us back to the negative option. One of the main advantages of the subscription model for businesses in the digital environment is when the user forgets when they’re up for renewal and is auto-billed.
The subscription process reduces the payment to a single moment of decision. Once the commitment is made, the payment is automatic. But what happens when a subscriber wants out, or if the customer sees a charge on a credit card they don't remember making?
Subscription businesses used to consider the negative option a key to success, but now, particularly on the consumer side, subscribers are getting understandably upset if they can’t easily cancel or get refunds.
Negative options are just the beginning. The industry is starting to see the emergence of “dark patterns.” For example, a famous shoe brand subscription service created what looked like a one-time purchase, but stored consumers’ cards for subscriptions and made opting out difficult. They went out of business quickly. Other fashion companies have seen subscription complaints, too.
Build trust through transparency
Companies must take responsibility for subscriptions. Radical transparency in a subscription business is extremely important, as is being consumer-centric. Businesses must consider little things like ensuring that every time they take a payment, they send customers an email to make them aware that the next product shipment is ordered and on its way.
This builds trust and loyalty, as does being clear on what they're getting when a customer signs up. This transparency around the financial transactions in a subscription model goes a long way towards building trust.
Companies might resist cancelled subscriptions, but it's more important than ever to be cognizant about how customers expect to be treated and make sure it matches the company’s values.
Simply put, companies that use the negative-option billing model should provide a simple mechanism for subscribers to cancel recurring charges. To do this, merchants need modern internal billing systems to support the flexibility required to let customers have their way with speed and ease.
Consumers want flexibility
Subscribers still want dependable subscriptions and the ability to auto-renew so they always have their products and services when they need them. But they also want transparency and flexibility.
They want to know that their subscription is based on their terms. If they want to skip a month, downgrade, and make other changes, they need easily accessible self-service portals to allow them to self-manage their plans, billing, and payment information. Merchants should make these capabilities readily available, versus burying a phone number to cancel subscriptions deep within a website where it's difficult to find.
Merchants want flexibility, too
It's vital for merchants to focus on the customer experience and enable customers to choose whether they want to stay with you based on customer service, quality of product, and so on.
With subscriptions, technology plays a fundamental role, and that’s true when it comes to avoiding the potential downsides of the negative option. Merchants need to be able to serve customers better by being able to make changes, such as downgrades, credit notes, and prorated billing.
The systems merchants use also need to make it easy when consumers choose to skip or pause their accounts. Again, flexibility in billing systems is crucial. For example, changes might need to be made to subscriptions in the middle of their terms. A subscription may be upgraded or downgraded to a different plan, or quantities may be added or removed. Since this introduces a change in the price of the subscription, prorated credits and charges need to be raised to ensure proper billing. These types of changes should be easy.
Today, the focus should be as much on customer retention as it is on acquisition. The success rate of selling to an existing customer is roughly 70%; while the success rate of selling to a new customer is only 5-20%. But retaining customers requires an exceptional customer experience.
Don’t make it difficult to quit; instead, provide the option and then deliver on the promise of great service and products so customers don’t want to leave. The end result: a better bottom line for merchants because customers will have higher lifetime value (LTV) and a better experience for consumers who get the convenience and flexibility they crave.