How Subscription Clubs Bring in Members

You’ve probably had an experience like this: You’re completing a purchase at an online shopping site when an offer of free shipping or cash back pops up. You accept the offer, and a couple of months later you notice that your credit card is being billed $10 or $20 a month for membership in a travel or discount shopping club. You didn’t realize it at the time, but by accepting that tempting offer, you joined the shopping club and agreed to pay the monthly dues it charges.

The companies behind these clubs, called posttransaction marketers, have been under fire recently from consumers and politicians who claim that their offers are deceptive or misleading. Here’s a look at how these companies sign up new members.

Posttransaction marketers find customers by making offers on partner sites such as Priceline, Buy.com, and MovieTickets.com. Here’s an example of a $10 cash back offer made last year on the NetZero Website for a membership club called Shopper Discounts & Rewards. The posttransaction marketing firm behind the offer is Webloyalty, one of the three biggest firms in this market.

Because such offers come during the checkout process for buying something (“While we process your order,” as the ad on the previous slide craftily puts it, under a header line that reads “NetZero     Online Registration”), many people assume that the offer is from the seller for a $10 refund on the current purchase. But this offer is typical: You get your $10 back only on a future purchase. And as the fine print on the coupon graphic shown here implies (but doesn’t explicitly say), accepting the offer means joining the Shopper Discounts & Rewards club.

When the Senate Commerce, Science, and Transportation Committee began looking at posttransaction marketing last year, it focused much of its scrutiny on a practice called a data pass. A data pass occurs when the site at which you’ve already made a purchase (in this case, NetZero) transfers your credit card data to the posttransaction marketer (in this case, Webloyalty). The data pass enabled Webloyalty to sign people up as members–and later to bill their credit cards for membership fees– without ever having to ask them for their credit card numbers.

The fine print just above the fields for entering and verifying your e-mail address authorizes the data transfer and affirms that you have read and agree to the club’s “Offer and Billing Details” (the two forbiddingly long paragraphs of densely packed small print in the blue box to the left of the e-mail address fields).

Under pressure from Commerce Committee investigators, the three biggest posttransaction marketers–Affinion, Vertrue, and Webloyalty–voluntarily agreed this year to change the way they present their offers. Now shoppers must reenter their credit card data (and other data fields) on the club signup form, a process that increases their likelihood of recognizing that they are joining a club they’ll be charged for. This example comes from a Webloyalty offer on MovieTickets.com.

Though the Big Three have agreed to operate by new rules, a number of other posttransaction marketers haven’t agreed to any reforms. During our reporting for this story, both Spiegel and ProFlowers offered club memberships from a firm called Encore Marketing International. This image shows an offer of free shipping “compliments of Spiegel Privilege Pass” that popped up on Spiegel.com after we completed a transaction on that site.

Since Encore Marketing didn’t participate in the voluntary agreement to reform posttransaction marketing offers, nothing prevents it from obtaining customers’ credit card information directly from Spiegel via a data pass. In this screen, all a Spiegel customer has to do is enter an e-mail address to become a member of Encore Marketing’s Privilege Pass club. Membership is free for 30 days, but then club members begin seeing monthly charges of $14.95 on their credit card statements.

After entering your e-mail address in the empty field of the pop-up offer, a page welcomes you to Privilege Pass, a club offering discounts on travel services and gift cards. Conspicuously absent from this page is any mention of the $14.95 monthly fee that will automatically kick in when the 30-day trial membership expires.

Within 24 hours of signing up, new members receive an e-mail message from Encore Marketing confirming their enrollment in Privilege Pass. Again, the message fails to point out to recipients that the free trial membership automatically becomes a $14.95/month recurring-fee membership when the trial period expires–unless the member cancels the account within the first 30 days.

Why would a retail site that works diligently to establish customer trust and loyalty agree to hand off its customers’ credit card data to third-party marketers hawking memberships in clubs that most people aren’t interested in belonging to? To overcome any qualms the retailers may have, posttransaction marketers put together a pitch that is every bit as attractive to sellers as the free trial offers are to consumers.

On its Website, Encore Marketing lays out the value proposition in terms an MBA could love. A three-image PowerPoint-like slideshow begins by promising “Programs that build customer loyalty and company profits…” Then it cuts to a slide that notes “Fact: Your current customers are a vital source of future revenues…” and provocatively (though not very intelligibly) asks, “What if you could enhance their loyalty while further monetizing core transactions?” Next comes this slide, which spells out the bottom line: millions or tens of millions of dollars in additional profits, “at zero cost to you.”

Affinion, Vertrue, and Webloyalty work with a network of hundreds of well-known and reputable Websites. They share profits with those sites in exchange for hosting their offers and (in the past) performing the data pass. This chart, assembled last fall by Senate Commerce Committee investigators, outlines how much money various sites had earned over the previous ten years from their partnerships with Affinion, Vertrue, and Webloyalty.

The Senate investigation has uncovered documents indicating that at least some posttransaction marketers have been aware for years that their offers were confusing consumers. In this 2003 e-mail to Webloyalty CEO Richard Fernandes, a company executive points out that “customers are unaware their [credit card] data is being passed [to Webloyalty].” The executive also notes that many consumers are unaware that they’ve joined a club that will automatically begin charging them a monthly fee unless they take active steps to avoid it: “its clear you get 30 days free, but not clear you’ll be automatically renewed if you dont cancel. And then the fee is buried too.”