This kind of billing scheme is actually incredibly hard to pull off these days. Although few laws have been passed to mandate anything, Congress has pressured Visa and MasterCard to crack down hardcore on chargebacks (disputed transactions). If you receive over 100 chargebacks in a month, current Visa/MC regulations stipulate that you must keep the chargebacks to less than 1% of your total transactions. If you go over that even for one month, you get fined an exorbitant amount for every single chargeback over 1%.
Getting fined is usually enough to get you thrown off your payment processor and added to something called the MATCH/TMF list, which you never want to be put on. Once you're on that list, you're completely and utterly fucked.
If you are terminated by one payment processor due to excessive chargebacks, and you try to get a new account with another payment processor, they first run a query on... you guessed it, the MATCH list. If you pop up on the list, every single legitimate payment processor will turn down your application "so fast it will make your head spin" (to quote a certain presidential candidate). How long do you stay on the MATCH list, you might ask? A minimum of 5 years, although I have heard from some people that you are on it for life. Basically, a MATCH listing blacklists you so you can likely never get a credit card processing account ever again.
HOWEVER... there are so-called "high risk" payment processors who "occasionally" will take MATCH/TMF merchants once you have been on the list for 6 months or more. But, it involves some luck and it will cost you.
Most mainstream payment processors like Chase Paymentech will charge you fees based on a pricing structure called "interchange plus," which is the base rate that goes to the credit card brands (Visa/MC) plus a padding fee of 25 basis points or less that goes to the processor (Chase). Depending on the types of credit card that your customers use, interchange ends up somewhere around 2 - 2.25%. But most "high-risk" payment processors won't even entertain the thought of giving you an account without charging at least 250 basis points plus interchange on a reasonably good account! But most of the time, they just abandon "interchange plus" altogether and charge you based on a 3 tiered structure (low, mid, and high rate). This allows them to pad the bill even more, of course. Not to mention that a whole mess of other fees are padded, as well, leaving you paying at least 6.5 - 7% per transaction when it's all said and done.
Oh, and I neglected to mention that if you expect to still accept Visa/MC, you still need to abide by their rules. So your options are: (a) get your chargebacks down to less than 1% of your total transactions, or (b) get less than 100 chargebacks per month. If you're a tiny operation, it's a little easier. You need to improve your customer service so that fewer customers dispute transactions. As long as the total value of your disputes is less than 3% of your total monthly revenue, you can usually fly under the radar. But if you're a small or medium sized company with 25,000+ transactions per month, you need to do some major surgery to your business model to stay at less than 1% chargebacks at all costs, and probably less than 0.75% so you have a little buffer in case your customers get a little trigger happy on the chargebacks in a given month. That basically takes subscriptions of any kind off the table, let alone "free trial" with autoship.
Which brings me back to my original point: a "free trial" with sneaky, fine-print autoship is actually INCREDIBLY difficult to pull off in this day and age. I am utterly baffled as to how JustFab, let alone Proactiv, the worst offender of them all, can pull this scheme off without getting MATCH listed. It especially makes no sense how JustFab has gotten away with this because it sounds like they have been sued left and right by private parties and the government for years. I can only postulate that they bring in such incredible amounts of revenue that Visa/MC and their payment processors simply turn a blind eye to it.
Maybe, as you mention in your excellent post, JustFab is paying an exorbitant fee to process payments? I have no idea what I'm talking about, but I can imagine some processors would be willing to take them on for a big enough slice of the pie. Especially since, as you mention, there aren't many laws mandating these things.
Right, Proactive, like you said, brings in so much revenue ($850M a year in 2010) and the profit margins are so high (most of their products are insanely cheap to produce (I've heard estimates of $1.20 for a month's supply that they sell for $30) that they could survive even on a high rate high risk interchange fee.
The way that these business's get past those regulations is pretty easy actually. They have multiple (and when I say multiple, i mean hundreds if not thousands) of payment 'accounts' (I think they are called pids) so if one of them gets killed it does not effect the entire business.
The other sneaky thing I heard some were starting to do was to determine if a card is a credit or debit card- You cant chargeback on a debit card so they treat those users worse.
The one thing I dont understand is the making it difficult for people to cancel via phone. Chargebacks cost money, so almost all of these guys give 100% refunds to anyone who calls. Not doing that seems stupid.
Its similar to back in the ringtone days how the providers would have hundreds of short codes, so that when some of them blew up, it wouldnt effect the entirety of the business.
Your original point holds true for amateurs - people without knowledge, connections and money. Pay the right people, the right amounts and you're good to go. Billing is incredibly complex thing, it's no surprise you see so many startups with very high valuations and a new one pops up every quarter. Those are just the very tip of the iceberg.
For some more lulz, google instabill and Daniel Tzvetkoff who processed billions of dollars for Pokerstars and Fulltilt.
"I signed up to get these shoes and didn't realize that they charge if you don't 'skip the month'. The first time I called and they refunded my money and said emails are sent monthly to remind customers to skip the month. Well the emails came for a few months and then they stopped so of course I forgot and was charged. I tried getting a refund and they said no so I had to use the credit. I tried cancelling the membership and my call never went through and when I started an online chat and told the associate the reason for my chatting with her was to cancel she disconnected us so I couldnt. After that my bank froze my card for some fradulent activity and issued me a new card with a new number and everything and so I thought the nightmare with this company was over. Well they charged me again and I called asking how they got my card number and they said they have a contract with a third party member that is able to get the details of my new card and that I agreed to allow that to happen when I signed up. Needless to say I figured out how to bypass the long phone prompts and was able to finally stop my membership with this company. They are ridiculous and should be out of business with the way they run things. "
Had a similar thing happen with one of my cards that got stolen. My bank canceled the card and sent me a new one. While no more fraudulent charges went through after that, I was puzzled when my automatic charges continued without failure. My bank told me that since the account was not closed and reopened, they just sent me a new card with a new number on the same account, thus only updating the same account. When this happens some processors receive your new card details and automatically update their records. I know Stripe does, although I don't know if they do it for both the number and expiration date, or just the expiration date. Either way, it is scary flaw in the banking system. (https://stripe.com/blog/smarter-saved-cards)
In case anyone else was confused, JustFab is not in fact the same company as Fab (despite their similar names, founders named "Goldenberg" and "Goldberg" respectively, and unsound business models).
Businesses like this depend largely upon forgetful users and credit card rebills to be viable. Successful user acquisition comes down to how small/hard to read/hard to find that rebill disclosure can be made without getting sued by the FTC. Smartest thing these guys ever did was recruiting Kate Hudson to be a celebrity spokesperson for the Fabletics brand, which threw a lot of regulators off and bought them some initial air cover. But at the end of the day it's the same business and they will eventually be held accountable to reasonable standards.
The FTC fines seem to be quite affordable to these players, who may just see them as a minor cost of doing business. Sensa for example had sales of $300m, fines of $26m. The example above has annual sales of around $250m. The profit margins on the sales numbers for these kinds of products are very high too.
Sensa, oddly, is still hailed as a Goldenberg and Ressler success story on JustFab investor Matrix Capital’s website
In case you're wondering, I'll save you a trip to Archive.org; here's what Matrix Partner's website said before they memory-holed SENSA:
The pair became fast friends, and when Intermix was acquired by News Corporation in 2005, Don and Adam were quick to start their own company. In 2006, they created an e-commerce brand incubator platform called Intelligent Beauty. The company became the home to SENSA, a weight-loss system based on groundbreaking research from Dr. Alan Hirsch, and DermStore, a service created by a board certified dermatologist who wanted to provide accurate skin care information and qualified skin care products online.
Is this the same company who about a year ago was copping a lot of flack because one of the founders was jetting back and forth between US and Europe first class every week to make sure he got / kept his United Global Services membership while they were laying off staff?
Fraud plain and simple. The executives should be in jail. Fucking weasels. They simply pay the government off to keep defrauding people. The VCs are happy to take their cut and enable them as well.
Did these VC firms not do their due diligence on Goldenberg and Ressler or did they just not care? I find it hard to believe that they secured $300MM in funding with nobody noticing this.
I do due diligence on VC/PE projects for a living. Either their diligence partner is really poor or they simply ignored their advice. Despite having $300MM on the line, you'd be surprised how often either situation happens.
The writing seems sloppy. For example, calling TCV a "small shop" is flat out wrong. Not only is it not small, by some measures, it is the biggest!! Having raised over $10b including an 8th fund at $2.2b! And Matrix is no slouch either having raised $2.4b including a $1b fund and seed investing in AAPL.
This media angency began as an "internet popularity contest in 2006". It rose to prominence by blog spamming and riding the coattails of the popular meme "clickbaiting". It gained notoriety for the amount fo javascript used to serve advertisiments, poor articles, limited content and tracking and selling user data. At one time it was the biggest clickbait and blogspam mill on the entire internet.
It has earned another distinction, as a unicorn. Having a value of north of $850 million, valued in an investment by silicon darling Andreesen Horowitz. Andreesen Horowitz partner Chris Dixon went on to proclaim that the company was a great investment and would be a legitimate media entity.
Buzzfeed, have you forgotten you are Buzzfeed. You can't write a quote like this, and be taken seriously:
In practice, that meant a factory of winking pop-ups, banner ads, advertorials, and landing pages everywhere from Yahoo Mail to AOL and MSN, displaying pictures of old women transforming into young ones and scales tipping to lighter numbers. The rapid A/B testing and modification of these ads has always been Goldenberg’s strength
The irony is glaring and the funniest part is they don't realize it.
To play devils advocate here, doesn't the individual always have a responsibility to read the fine print rather than blindly plugging their credit card details into an offer for cheap shoes?
Do we want to live in a world where we have to actually read things like Apple's terms and conditions instead of just clicking I agree?? Only trivial stuff should be in fine print imo. Something concerning the charging of your credit card should be clearly visible.
From reading the link below to the JustFab investor though it doesn't really seem like they are intentionally being that deceptive but idk
[+] [-] jmagaro88|10 years ago|reply
Getting fined is usually enough to get you thrown off your payment processor and added to something called the MATCH/TMF list, which you never want to be put on. Once you're on that list, you're completely and utterly fucked.
If you are terminated by one payment processor due to excessive chargebacks, and you try to get a new account with another payment processor, they first run a query on... you guessed it, the MATCH list. If you pop up on the list, every single legitimate payment processor will turn down your application "so fast it will make your head spin" (to quote a certain presidential candidate). How long do you stay on the MATCH list, you might ask? A minimum of 5 years, although I have heard from some people that you are on it for life. Basically, a MATCH listing blacklists you so you can likely never get a credit card processing account ever again.
HOWEVER... there are so-called "high risk" payment processors who "occasionally" will take MATCH/TMF merchants once you have been on the list for 6 months or more. But, it involves some luck and it will cost you.
Most mainstream payment processors like Chase Paymentech will charge you fees based on a pricing structure called "interchange plus," which is the base rate that goes to the credit card brands (Visa/MC) plus a padding fee of 25 basis points or less that goes to the processor (Chase). Depending on the types of credit card that your customers use, interchange ends up somewhere around 2 - 2.25%. But most "high-risk" payment processors won't even entertain the thought of giving you an account without charging at least 250 basis points plus interchange on a reasonably good account! But most of the time, they just abandon "interchange plus" altogether and charge you based on a 3 tiered structure (low, mid, and high rate). This allows them to pad the bill even more, of course. Not to mention that a whole mess of other fees are padded, as well, leaving you paying at least 6.5 - 7% per transaction when it's all said and done.
Oh, and I neglected to mention that if you expect to still accept Visa/MC, you still need to abide by their rules. So your options are: (a) get your chargebacks down to less than 1% of your total transactions, or (b) get less than 100 chargebacks per month. If you're a tiny operation, it's a little easier. You need to improve your customer service so that fewer customers dispute transactions. As long as the total value of your disputes is less than 3% of your total monthly revenue, you can usually fly under the radar. But if you're a small or medium sized company with 25,000+ transactions per month, you need to do some major surgery to your business model to stay at less than 1% chargebacks at all costs, and probably less than 0.75% so you have a little buffer in case your customers get a little trigger happy on the chargebacks in a given month. That basically takes subscriptions of any kind off the table, let alone "free trial" with autoship.
Which brings me back to my original point: a "free trial" with sneaky, fine-print autoship is actually INCREDIBLY difficult to pull off in this day and age. I am utterly baffled as to how JustFab, let alone Proactiv, the worst offender of them all, can pull this scheme off without getting MATCH listed. It especially makes no sense how JustFab has gotten away with this because it sounds like they have been sued left and right by private parties and the government for years. I can only postulate that they bring in such incredible amounts of revenue that Visa/MC and their payment processors simply turn a blind eye to it.
[+] [-] fapjacks|10 years ago|reply
[+] [-] FireBeyond|10 years ago|reply
[+] [-] DanBlake|10 years ago|reply
The other sneaky thing I heard some were starting to do was to determine if a card is a credit or debit card- You cant chargeback on a debit card so they treat those users worse.
The one thing I dont understand is the making it difficult for people to cancel via phone. Chargebacks cost money, so almost all of these guys give 100% refunds to anyone who calls. Not doing that seems stupid.
Its similar to back in the ringtone days how the providers would have hundreds of short codes, so that when some of them blew up, it wouldnt effect the entirety of the business.
[+] [-] omarchowdhury|10 years ago|reply
[+] [-] blumkvist|10 years ago|reply
Your original point holds true for amateurs - people without knowledge, connections and money. Pay the right people, the right amounts and you're good to go. Billing is incredibly complex thing, it's no surprise you see so many startups with very high valuations and a new one pops up every quarter. Those are just the very tip of the iceberg.
For some more lulz, google instabill and Daniel Tzvetkoff who processed billions of dollars for Pokerstars and Fulltilt.
[+] [-] nashequilibrium|10 years ago|reply
"I signed up to get these shoes and didn't realize that they charge if you don't 'skip the month'. The first time I called and they refunded my money and said emails are sent monthly to remind customers to skip the month. Well the emails came for a few months and then they stopped so of course I forgot and was charged. I tried getting a refund and they said no so I had to use the credit. I tried cancelling the membership and my call never went through and when I started an online chat and told the associate the reason for my chatting with her was to cancel she disconnected us so I couldnt. After that my bank froze my card for some fradulent activity and issued me a new card with a new number and everything and so I thought the nightmare with this company was over. Well they charged me again and I called asking how they got my card number and they said they have a contract with a third party member that is able to get the details of my new card and that I agreed to allow that to happen when I signed up. Needless to say I figured out how to bypass the long phone prompts and was able to finally stop my membership with this company. They are ridiculous and should be out of business with the way they run things. "
[+] [-] jeffmould|10 years ago|reply
[+] [-] morgante|10 years ago|reply
Fab: https://en.wikipedia.org/wiki/Fab_(website)
JustFab: https://en.wikipedia.org/wiki/JustFab
[+] [-] mozumder|10 years ago|reply
[+] [-] talltofu|10 years ago|reply
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] nugget|10 years ago|reply
[+] [-] arbuge|10 years ago|reply
https://www.ftc.gov/news-events/press-releases/2014/11/ftc-i...
The FTC fines seem to be quite affordable to these players, who may just see them as a minor cost of doing business. Sensa for example had sales of $300m, fines of $26m. The example above has annual sales of around $250m. The profit margins on the sales numbers for these kinds of products are very high too.
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] tptacek|10 years ago|reply
In case you're wondering, I'll save you a trip to Archive.org; here's what Matrix Partner's website said before they memory-holed SENSA:
The pair became fast friends, and when Intermix was acquired by News Corporation in 2005, Don and Adam were quick to start their own company. In 2006, they created an e-commerce brand incubator platform called Intelligent Beauty. The company became the home to SENSA, a weight-loss system based on groundbreaking research from Dr. Alan Hirsch, and DermStore, a service created by a board certified dermatologist who wanted to provide accurate skin care information and qualified skin care products online.
[+] [-] burger_moon|10 years ago|reply
An investor even chimes in to defend the company.
Similar topics discussed in there as are in this one. This ride doesn't end.
[+] [-] mintplant|10 years ago|reply
https://news.ycombinator.com/item?id=6455575
[+] [-] FireBeyond|10 years ago|reply
[+] [-] FireBeyond|10 years ago|reply
[+] [-] dreamdu5t|10 years ago|reply
[+] [-] briholt|10 years ago|reply
Rookie mistake. The most coveted achievement is to exit for over a billion dollars.
[+] [-] chrissnell|10 years ago|reply
[+] [-] mbesto|10 years ago|reply
[+] [-] dreamdu5t|10 years ago|reply
[+] [-] pagkag|10 years ago|reply
[deleted]
[+] [-] pbreit|10 years ago|reply
[+] [-] on_|10 years ago|reply
It has earned another distinction, as a unicorn. Having a value of north of $850 million, valued in an investment by silicon darling Andreesen Horowitz. Andreesen Horowitz partner Chris Dixon went on to proclaim that the company was a great investment and would be a legitimate media entity.
Buzzfeed, have you forgotten you are Buzzfeed. You can't write a quote like this, and be taken seriously:
In practice, that meant a factory of winking pop-ups, banner ads, advertorials, and landing pages everywhere from Yahoo Mail to AOL and MSN, displaying pictures of old women transforming into young ones and scales tipping to lighter numbers. The rapid A/B testing and modification of these ads has always been Goldenberg’s strength
The irony is glaring and the funniest part is they don't realize it.
[+] [-] pbreit|10 years ago|reply
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] unknown|10 years ago|reply
[deleted]
[+] [-] iamadam|10 years ago|reply
[+] [-] sageabilly|10 years ago|reply
[1]https://www.techdirt.com/articles/20120420/10560418585/to-re...
[+] [-] TearsInTheRain|10 years ago|reply
From reading the link below to the JustFab investor though it doesn't really seem like they are intentionally being that deceptive but idk