Flexible payment solutions, no-cost trial periods, and automatic billing methods are all strategies aimed at encouraging customers to opt for ongoing purchases. It seems to work, as data from Bango indicates the typical American is subscribed to around 4.5 services at any given time.
eCommerce businesses garnered $193.6 billion in revenue from subscriptions in 2023. But this doesn’t come without a trade off.
Payway has revealed that an average of 1.2% of transactions processed by subscription vendors result in a chargeback; a rate that’s two to three times higher than the average dispute rate among card-not-present retail. Ongoing grievances from consumers regarding deceptive billing tactics and troublesome subscription cancellations have led to numerous disputes being filed with card issuers. But, such practices are now garnering regulatory attention.
The Federal Trade Commission (FTC) has logged 16,000 complaints relating to subscription billing thus far in 2024. In response to substantial public dissent, the FTC introduced a new “click-to-cancel” rule, which calls for merchants to simplify subscription cancellations.
Established industry associations such as the Electronic Security Association and The Internet & Television Association have voiced their objections to the new regulation, terming it “random” and “burdensome.” Nevertheless, I believe there’s a good chance that the FTC’s click-to-cancel regulation could turn out to be more beneficial to honest sellers than detrimental.
What Does the New FTC Rule Entail?
This updated rule, set to be implemented in 2025, refines the FTC’s 1973 Negative Option Rule. This date ruleset was primarily focused on magazine and newspaper subscriptions. However, today’s subscriptions are significantly different.
Negative option tactics, where merchants automatically sign customers up for paid services unless they actively cancel, are widely used. This strategy is particularly common among subscription vendors aiming to transition users from free trials to paying customers.
The most notable part of the rule is that it compels merchants to supply a “simple mechanism to cancel the negative option feature and promptly stop charges.” This directive is set to eliminate intentionally complex cancellation procedures created to lock customers into contracts.
The FTC’s updated rule demands that merchants transparently disclose any cancellation fees and policies related to a subscription plan before offering it. It also bans misleading or deceptive marketing techniques for subscriptions. The FTC has cautioned businesses of the potential penalties and lawsuits if they do not adhere to these rules.
Can Merchants Benefit From the Click-to-Cancel Rule?
The FTC primarily had consumer rights in mind when crafting the new rule, but it may bring about positive effects for merchants, too. While making it difficult for customers to cancel subscriptions could theoretically reduce churn, real evidence suggests otherwise.
As we’ve mentioned earlier, subscription vendors are at an elevated risk for disputes. This is typically because customers find it hard to cancel subscriptions or believe that cancellation will be a chore, leading them to their banks for assistance. 88% of customers surveyed in the 2024 Cardholder Dispute Index expressed their desire for bank intervention in subscription cancellations. So yes, customers who can’t cancel a subscription won’t, because they’ll opt for chargebacks instead.
Chargebacks equate to lost revenue and overhead. Chargeback fees can cost vendors between $20 to $100 per incident, too. A mere reduction in subscription-related chargebacks via streamlined cancellation processes could easily compensate for slight increases in customer churn.
There are additional benefits as well. Customers who are offered easier cancellation options are less likely to feel trapped into paying for services. They could develop a more positive attitude towards merchants who treat them fairly, reducing the likelihood of cancellations.
Furthermore, vendors may also reprioritize. Sellers who can no longer hold customers hostage with their cancellation practices may be motivated to shift their focus towards customer retention strategies. This consumer-friendly approach is likely to enhance service and strengthen business operations in the long run.
What Other Measures Can Merchants Implement to Minimize Chargebacks?
Adherence to the new click-to-cancel rule alone won’t completely eradicate subscription chargebacks. For effective reduction in customer disputes, merchants should also consider:
Clear Billing Descriptors
These identifiers that appear on card statements assist customers in remembering their subscriptions and identifying the service providers. Clear billing descriptors prevent customers from misinterpreting legitimate purchases as fraudulent, thereby reducing chargebacks. These are particularly crucial for businesses that bill customers less frequently (like quarterly or annually).
Transparent Communication
Remind customers about upcoming subscription charges. Provide frequent updates about billing cycles and draft easy-to-understand cancellation policies and subscription terms. Ensure customers receive billing confirmation emails and have access to a dashboard to track their subscriptions and billing history.
Keep an Eye on Transactions for Potential Fraud
Deploy secure fraud detection software with payment processors to prevent fraudulent chargebacks and analyze past chargeback data to identify common chargeback reason codes. Better yet, use third-party risk scoring, predictive modeling, or behavioral analytics tools to examine transactions for anomalies or suspicious trends in real-time.
Maintain Organized, Detailed Records
Maintain records of all customer interactions, consent for charges or cancellation requests, proof of delivery or fulfillment, and other transaction-related documents. These will serve as useful references when customers submit support tickets or refund requests and can be used as evidence during the chargeback representment process.
Involve Customers in Decision Making
Give customers a real say in the business. Changes in product roadmaps, service improvements, and changes to pricing and subscription tiers should all involve customer feedback. Remember, you’re operating the business to serve customers, so strive to prioritize their needs.
These are just a handful of the steps merchants can implement. Ultimately, there are countless opportunities to engage and retain customers. The key factor is one’s own capacity for innovation.
Merchants who work on enhancing customer retention through a better customer experience — instead of attempting to trap customers with confusing terms and conditions — will ultimately come out on top.
