Nasir and Matt talk about JustFab’s crazy valuation for a company that offers subscription based clothes. They also get into topics of the evils of subscription model pricing and cancellation policies.
NASIR: Welcome to our podcast where we cover business in the news and add our legal twist to the business news. My name is Nasir Pasha.
MATT: And I’m Matt Staub.
NASIR: I would say you’re like the fashion guru of the two of us, wouldn’t you say?
MATT: Well, first of all, I knew you were going to say that. I was about to say something because I knew you were going there and, two, I would disagree with that. I think you’re more fashionable than I am.
NASIR: Well, no, that assumes that I’m making my own fashionable decisions. I would say that you make your own fashion decisions in a very fabulous way – just fab way.
MATT: Just fab? Okay. Now I got you because that’s what we’re talking about – JustFab which apparently is a start-up worth one billion dollars. I’d never even heard of it so it’s kind of crazy how it can be worth that much. I guess I also don’t buy any clothes or anything like that online.
NASIR: But you’re right. There shouldn’t be anything worth a billion dollars that we haven’t heard about. That’s just wrong.
MATT: Yeah. Well, I think we can explain why they’re worth so much with the kind of their business practices and it all kind of stems from… it sounds like, well, there’s a bunch of different things going on with them but one of the things is this subscription model that they kind of lock these customers into but, you know, just going back a bit about the history of the company, I mean, it looks like they started off more so with diet pills and wrinkle creams, using free trials, and then locking people, and this is something that’s not new to them. That’s why, any time I see a free trial, I’m always hesitant and I rarely ever actually sign up for it. If I do, I make sure that it doesn’t automatically roll into an automatic reoccurring subscription because that’s when you get locked in and end up having to pay and you forget about it and that’s a lot of money out of your pocket for something that was supposed to be a free trial. That’s what they started doing here with these diet pills. Eventually, they moved on to more fashion clothing items, things like that. But then, they did a couple of curious things and I’m not even fully sure how exactly this works. It’s a subscription model to buy something like shoes. They pay for the subscription model. This one person was saying, “I thought I was getting a good deal on shoes and I didn’t realize that I was signing up for a subscription that would be difficult to cancel. I was trying to buy one pair of shoes. Instead of that, I got signed up for a VIP club which charges me $40 every month,” and basically, you know, it was apparently difficult for this one person to get out of it. They just tried to do a one-time transaction and ended up getting caught up into a month-to-month – or I assume month-to-month – at least some sort of subscription where it probably took them a while to get out of. I’m sure there was long times of notice you had to give before terminating the subscription, things like that. And so, do that with one person, okay; do that with a lot of people, I think that’s how you kind of get to that one billion dollar mark.
NASIR: Yeah, the subscription model for products and services, it’s in every business now. I mean, pick any service – whether it is transportation to selling any kind of products online – there’s a subscription for that. I think one of the most famous ones is that razor club, right?
MATT: Dollar Shave Club.
NASIR: Dollar Shave Club or whatever. I think they seem to be one of the most successful – well, I don’t know compared to JustFab or not. But I think the problem with it – and I don’t believe the other subscription models do this – is that you only have a five-day window to cancel. That seems very strange. I’ve seen these other clothing sites like these subscription box models, right? Maybe you’re charged $14.00 a month and then you’re sent a box of whatever but that makes sense because you’re paying for something and you’re receiving something. But it seems as though, with JustFab, you may be paying something that you may not actually get the full benefits with if you don’t utilize it. I think that’s the case, right?
MATT: Yeah. I mean, it sounds like you’re just paying to have access to this.
NASIR: Have access, yeah.
MATT: And timing with fashion I guess is the big thing so maybe you can supposedly see items of fashion or clothing, et cetera, before other people and that might be worth it but I think it sounds like a lot of these people are just getting conned into signing up for the subscription when they don’t mean to. For people or if they’re listening to this or listening to a podcast obviously, if you ever listen to other podcasts – I don’t know why you would but if you listen to one other than ours that have ads on them – a lot of the ads are subscription-based products that they’re trying to push. Like you said, it’s just kind of the way things are going. If you do it fairly – or at least reasonably – then it’s fine. I did… what’s the one? NatureBox.
MATT: I did that for a while and I think I could cancel at any point up to the cycle went out so those are favorable terms.
NASIR: Yeah, that makes sense. Well, let me ask you. How did you cancel it?
MATT: I think I just went online and did it because their online was pretty good. But I just had another one – this is recent – it just happened I think yesterday. I was subscribing to an annual subscription to the Wall Street Journal. I was like, “You know what? I don’t really use this that much. I’ve had it for a few years. I need to cancel it,” and I went on there. I saw that it was set to renew, like, October 20-something and I was like, “Ah, within thirty days. I hope I can get out of this and not have to pay a whole ‘nother year,” and I read the fine print and it’s like, “If you’re zero to eleven months, you can stop it and you get refunded the rest of the year if it’s in the last thirty days of the year as long as you cancel it before the end of the year. You don’t have to renew.” I was like, “Oh, perfect!” All I had to do, the only thing was I had to call in, wait on hold for fifteen minutes, and the took care of it. Well, I guess, stay tuned when it doesn’t end up working and I get, you know, billed for it in a few weeks which has also happened. It sounds like they’re pretty good with it so, I mean, to me, as long as it’s reasonable. Anything I think that’s reasonable, you can cancel within the month, under thirty days before you want to end up if that makes sense.
NASIR: Yeah, you should be able to cancel at any time. Thirty days’ notice is fine but at any time. Like, you may have to give, if you don’t get a certain time, you maybe have to go through one month. See, what was interesting is that there’s a lot to play here but what are the comments that this particular BuzzFeed story went over with is that they also have lengthy cancellations on phone calls. To me, at the least, if you sign up online, you should be able to cancel online, too. That’s why I asked you for NatureBox.
MATT: I think I did, yeah.
NASIR: It’d be weird to have to call a number when it was so easy to sign up with giving your credit card number and then this whole process to cancel. These kind of nuance things just really shows you kind of the personality and culture of the company and, to talk a little bit about that, this particular company has founders who came from an industry of… was it supplements or some kind of beauty product?
NASIR: I think they were in different things of the same kind of subscription model which they ended up bringing to clothing and shoes and things like that for which they didn’t get involved with an FTC settlement and there’s been other legal troubles with certain district attorneys of California and Florida that have gone after them or their affiliated companies and so forth for such practices involving this. But, at the end of the day, like I said, I don’t think there’s anything wrong with these subscription services but, at a certain point, like, you have to be able to give a quality service and sleep at night. By the way, this company is funded quite a bit by Silicon Valley, including certain celebrities – I think Goldie Hawn’s sister or daughter.
MATT: Sounds famous.
NASIR: Oh, Kate Hudson.
MATT: is that Goldie Hawn’s daughter?
NASIR: I think so. I could be way off.
MATT: Huh, I didn’t know that.
NASIR: They don’t have the same last name. I don’t know if you noticed that.
MATT: Yeah. Well, so I think with subscription model based pricing, there’s two ways to get tricked into it or to get stuck and end up paying more than you want. Basically, one way is to put into the pricing without you really knowing it and I said something about like the free trials that automatically roll into the automatic monthly payments, things like that, or I don’t know if that’s happened with this case. That’s one way to do it. Two, just be, like you said, to make it impossible to cancel. Call on the phone, long wait times. Actually, when I was doing the thing with Wall Street Journal, I first tried to do the online chat and I was like, “Oh, great! I’m number two in the queue.”
MATT: Screen popped up, so and so has entered the chat room, and I started typing, and then they left the chat room. Guess I have to call in.
NASIR: That’s a problem, too. You’ll call and wait on hold and get to the department and then, of course, it disconnects at the last second right then when they were going to cancel it and you have to call back in.
MATT: Yeah. I mean, for me, someone who calls the IRS on a frequent basis, I mean, there’s nowhere I could call where I could get, I mean, I am so trained to just sit on the phone and wait. If you deal with the IRS, it’s never a problem for me, basically. I’m so used to it. Most people know, though.
NASIR: Let’s talk about a little about the law. These auto-renewal clauses, they’re also called evergreen clauses. It’s not a very common term, even amongst lawyers. I don’t know if you’ve heard of that, Matt. But, with evergreen clauses, some states have actually gone as far as to protect some consumers and some individuals with these kind of clauses by, for example, in California, these evergreen clauses for consumers have to be in bold or highlighted somehow relative to the rest of the contract and they should also be basically clear and conspicuous is what they say but also they should be near the customer’s signature or online purchase authorization button if you’re doing it online, but that is only for a very limited type of contract. You know, the same way with Illinois has something similar. If the contract’s term was twelve months or more and the renewal period is for more than one month, written notice to the consumer must be made no less than thirty days and no more than sixty days before the cancellation deadline set by the contract. Those are for more long-term contracts. Texas, of course, has no protections. New York has a strange protection only for business to business and that’s for service contracts only. I actually ran into this before. So, there’s some protections here and there but not really here that applies to JustFab because they can be clear and conspicuous if they want, but the terms could still be pretty restrictive – like that five-day window.
MATT: Yeah. I mean, that’s that and, like you said, you can make it clear and still make it impossible for them to get out of it. I mean, a five-day window is very small when it’s hard to end the agreement. I like how they called it – well, not they, someone else coined this – “negative option marketing” where customers get charged for a VIP membership unless they remember to opt out. Like, it should never be on, well, I was going to say it should never be on the customer to opt out but, I guess, if they agree to it and it’s fair, then that’s kind of on them.
NASIR: I think they’d have to know about it because this kind of type of marketing, I think when they say “negative option marketing,” it reminds me of kind of these industries that sell supplements that are kind of prying on buying one product and, all of a sudden, you’re signed up with a subscription service, and that kind of happened, if you recall, with FreeCreditReport.com. You get your free credit report but then, all of a sudden, you’d be paying this monthly fee for who knows what.
NASIR: And so, I think that’s the negative option, the kind of marketing they’re referring to.
MATT: I guess, from a business’ perspective, what do you think? I mean, I think, for a business, if it makes sense, then it’s a good model to have as a business.
NASIR: Yeah, you just have to be clear with the consumers. If it’s a surprise that all of a sudden there’s a credit card charge, and if it’s becoming very onerous to cancel that, then that doesn’t seem to make sense either. You know, it’s the same thing with a term in a contract. If there’s an impression of the person signing that this is a contract that they can get out at any time but it’s actually a three-year agreement, then there’s probably something wrong. If the person doesn’t read the contract, that’s one thing. But, if it’s somehow hidden or unclear, then that’s not really correct anyway and that’s just going to cause dispute, and (a) if you want to become a billion-dollar-company on the backs of people that are just lazy, then that’s your prerogative.
MATT: I’ve met with people that they more or less kind of that was their philosophy – just conning people. My take was it was actually just conning people – well, not conning but making money off of people being lazy and they knew it.
NASIR: Yeah, taking advantage.
MATT: If you look at your bank account, great, but you also have to look in the mirror every day, too. Unless you don’t buy mirrors, then you don’t. Maybe that’s what they did – no mirrors in the house.
NASIR: Yeah, or unless you’re a vampire.
MATT: Yeah, it could be the case as well.
NASIR: Okay, well, we can end on that happy note.
MATT: Yeah, I think we covered this. It can be good for businesses. If you’re a consumer, just be careful. Read the fine print which nobody does but try to remember to do that.
NASIR: All right. Well, thanks for joining us.
MATT: Keep it sound and keep it smart.