Negative option offers are nothing new in marketing, as companies have been employing the tactic for decades with Book of the Month clubs and CD offers. But with new technology comes new potential pitfalls.
With negative option offers, consumers typically get a free trial membership or a free product, and when they sign up, they provide information including a credit card number. Then, if they fail to cancel within that free trial period, they are automatically enrolled in the service and are billed at regular intervals, says Stephen Weisskopf, senior attorney at Theodora Oringher Miller & Richman PC.
“Negative option marketing is not illegal, and it can be a very effective marketing tool, but you have to do it the right way,” Weisskopf says. “The key is to set it up the right way from the beginning, not waiting for a call from the Federal Trade Commission or a complaint from a plaintiff lawyer.”
Smart Business spoke with Weisskopf about how to stay out of trouble with the FTC, avoid class-action lawsuits and stay in your credit card companies’ good graces by using negative option marketing the right way.
What best practices can a business employ to help it avoid the potential pitfalls of negative option offers?
The general rule is that you need to make the terms and conditions of your offer clear and conspicuous. If you’re offering a free trial membership, you have to provide the key disclosures in close proximity to where the offer is made on your Web site.
Be upfront with terms so consumers know what they’re getting into. If you’re saying, ‘Sign up for a free trial membership in my service,’ immediately below that should be the disclosure that it is free for 30 days and that if you do not cancel within 30 days you are agreeing to be automatically enrolled in the service and you will be automatically charged. It should also be clear what the charges are, when the charges will occur, how they will be charged, how to cancel, and any other key terms and conditions. You should also make consumers click on an ‘Accept’ or ‘I Agree’ button whereby they acknowledge their agreement to the previously disclosed key terms and conditions.
What you shouldn’t do is make consumers hunt for the key terms and conditions by placing them, for example, at the bottom of the Web page, having them in a small font or making consumers click on a hyperlink to go to a separate page to find the key terms.
As you are designing your advertisements, the key concept to keep in mind is whether a reasonable consumer is likely to be deceived by your advertisements. That’s the general standard courts and the FTC employ in evaluating allegedly deceptive advertisements.
What else can a company do to stay clear of potential problems?
Another area where companies get into trouble is when they do not have an adequate call center or clear cancellation procedures, because that leads to unhappy consumers. If consumers have to make several phone calls or endure lengthy hold times in order to cancel, it is more likely they will make a formal complaint. That complaint may be made to the FTC, the Better Business Bureau or a consumer advocacy Web site. The more consumers complain, the more likely you will pique the interest of the FTC or of a plaintiff’s lawyer.
Complaints can also negatively impact your relationship with your credit card company. If consumers believe they have been deceived or are generally frustrated with your company, they will dispute the charge with their credit card company, which generally results in a chargeback. Your agreement with credit card companies or payment processing companies generally requires that monthly chargebacks fall below a certain percentage of sales. When chargebacks routinely exceed that percentage, you are subject to significant fines or termination of the agreement. While you can challenge the chargeback, that is an uphill battle and also requires resources.
What impact can it have on a business if its marketing practices draw the attention of the FTC?
I can’t emphasize enough how much a company does not want to put itself in the crosshairs of the FTC. Once the agency begins to seriously investigate a company, there is generally no turning back. You can fight and force the FTC to sue you in federal court, but the deck is really stacked against you. Courts generally give deference to the FTC’s judgment on what is deceptive. As such, many companies settle, which means making changes to your marketing practices (i.e., changes to your Internet page) and monetary compensation, which can be significant.
If you settle, the FTC posts a press release on its Web site, complete with a copy of the complaint and settlement agreement. Then you just have to hold your breath and hope you don’t get an onslaught of copycat lawsuits.
Where can a business owner get more information on the do’s and don’ts of negative option offers?
The FTC’s Web site at www.ftc.gov is a valuable resource because it contains manuals and guidelines on advertising practices for both businesses and consumers. The other thing to do is hire someone familiar with FTC guidelines and regulations who can help you navigate these waters. While no one can say for sure, ‘If you do it this way, you’ll be fine,’ or, ‘If you do it that way, you’re going to get into trouble,’ they can advise you on best practices, where the problems are with your advertisements and how you can better make them clear and conspicuous.
Stephen Weisskopf is a senior attorney at Theodora Oringher Miller & Richman PC. Reach him at firstname.lastname@example.org (310) 557-2009.