The Federal Trade Commission is scrutinizing the booming usage of subscription pricing, key to the typical software-as-a-service (SaaS) platform, a Washington Post report finds.
After a rash of complaints by subscribers on the consumer side of the business, the FTC is taking a look at whether the way many companies structure their billing — known as a negative option, because it equates subscriber silence to renewal consent — is being abused.
“The commission is trying to figure out how best to respond to this problem and, in doing so, is looking at all its tools,” James Kohn, an FTC associate director, told the Washington Post.
The FTC has limited authority, tools and resources to tackle the problem.
The last law enacted to address subscription issues, the “Restore Online Shoppers’ Confidence Act (ROSCA),” was in 2010. Among other things, it requires companies that use the negative-option billing model to provide a simple mechanism for subscribers to cancel recurring charges, but because of ambiguity over what constitutes a simple mechanism, the law hasn’t done much to hold companies accountable for abuses.
“Companies will say, well, you can call us, but the issue is you can never get through or you’re on hold for hours,” Bonnie Patten, executive director of Truth in Advertising, told the Post.
Potential B2B impact
Although the FTC scrutiny is focused on the consumer side of subscription pricing, it could have implications for the business-to-business side of the model. The agency could create principles that courts and other regulators could apply in a non-consumer context.
Especially for technology companies, subscription-based recurring revenue is key to attracting capital; investors like it because it gives them confidence the company has a stable source of revenue.
“Volatility in revenues … is just so hard to sell to an investor," one CFO said last year in a podcast.
Technology CFOs across the board say annual recurring revenue is integral to their growth plans.
One CFO equated the company’s annual recurring revenue (ARR) model to a snowball, because as subscribers are added on, company revenue expands like a snowball.
An industry survey conducted two years ago found subscriptions increase incremental spend by 60% and that 83% of retail leaders view recurring customers as integral to their strategy.
Negative-option abuse
The FTC’s interest in the issue isn’t over subscription pricing as a practice; it’s over companies that abuse the negative billing option by signing up consumers using deceptive or ambiguous procedures or making it hard or confusing to cancel and, if necessary, get a refund.
The agency in 2019 said it wanted to tighten up its rules on negative-option billing but it hasn’t taken steps to do that yet, according to the Post report.
That might change under the Biden administration; the rule is one of about two dozen the agency said it has put under review.
In the courts, the few big cases to be litigated have been on the consumer side. A 2015 case, for instance, involved DirectTV, which the FTC said was tricking consumers with automatic charges and imposing onerous cancellation fees, but that case was dismissed.
Other cases have had mixed results, although last year the FTC negotiated a $10 million settlement with education company ABCmouse for allegedly unfairly billing consumers and making it hard to cancel.
Bottom line: To the extent the FTC ramps up subscription pricing scrutiny, it’s focus will likely be on consumer models but it could end up having ramifications for business-to-business models as well.
