The Future of Shopping:

Trapping You in a Club You Didn’t Know You Joined

A $19.95 set of lacy lingerie had already cost Hailee Taylor more than $300 in credit card charges and a half-hour in customer-service limbo when the cheerful melody of Jessie J’s hit song Domino started playing. As the pop anthem repeated on a loop, Taylor waited another 45 minutes to speak to her second Adore Me representative.

She wanted to escape the subscription-fueled future of online shopping, a business model that has in recent years attracted a billion-dollar bet from venture capital investors.

The 25-year-old teacher from Ohio had months earlier made a single purchase on AdoreMe.com, without noticing that she had joined the retailer’s subscription service. After spotting the credit card charges in early 2014, Taylor called and says she learned she was paying $39.95 like clockwork each month to maintain her status as an Adore Me VIP Member.

A first-time visitor to Adore Me’s website can peruse bras, undies, and pajamas, just like any other online retailer, and no subscription is required to make a purchase. But the startup says nearly all of its sales come through its VIP Membership. These subscribers get access to discounted underwear—and they are billed at least $39.95 every month for store credit, even if no purchase is made. Want to avoid the charge? You must act during the first five days of the month.

The specifics of the membership model were unclear to Taylor when she opted for what appeared to be a fabulous introductory discount on her first purchase. “‘Free’ was blasted everywhere on their website,” she says. “I felt really misled.” (Adore Me has made adjustments to its membership model and says customer complaints have been falling.)

Once freed from the hold music, Taylor got the bad news: Adore Me would refund her the current monthly membership charge and provide store credit for two past months; the rest of the billings, totaling nearly $240, would be lost forever under a use-it-or-lose-it policy that has since been rescinded. No, she couldn’t speak to a manager.

Adore Me is among a group of buzzy Internet retailers accused of sometimes placing customers into unwanted and hard-to-cancel retail subscriptions. Several of these companies have been hit with lawsuits alleging unfair business practices, including JustFab (apparel), Blue Apron (food delivery), and Birchbox (beauty samples). Adore Me is currently facing a lawsuit from a disgruntled subscriber. JustFab, which also owns ShoeDazzle and Kate Hudson’s athletic wear shop Fabletics, last year paid a $1.88 million fine as part of a settlement over allegations of deceptive marketing. Stamps.com likewise paid $2.5 million to settle a similar suit. (Blue Apron, Birchbox, and Stamps.com did not respond to requests for comment.)

There’s nothing illegal about retail subscriptions, of course, and many businesses with automatic renewals make the billing process crystal clear. Some services are transparent in their mission and describe themselves primarily as pay-each-month subscriptions, like razor seller Dollar Shave Club.

But weak and misleading disclosures are pervasive among subscription e-commerce businesses, says Francisca Allen, the deputy district attorney of California’s Santa Clara County. Allen pursued the JustFab and Stamps.com settlements, both of which included reforms to the companies’ websites. Consumers are losing tens or even hundreds of millions per year on unwanted automatic-renewal subscriptions, she says, and there’s not enough regulatory muscle to monitor and stop unfair practices.

“It’s the new thing,” says Allen. “There’s thousands and thousands of companies that do this.”

Hundreds of customer complaints against Adore Me and other subscription e-commerce businesses are stacking up at the Federal Trade Commission, according to records obtained by Bloomberg. They follow a pattern: Shoppers believe they’ve been tricked into signing up for recurring credit card charges, often for a relatively small amount that can be easily overlooked in a monthly bill. Then companies make it an exasperating hassle to quit and get a refund.

“They present consumers with this incredible offer and they don’t simultaneously inform them of all the downsides,” says Bonnie Patten, executive director of Truth in Advertising, a consumer-rights watchdog.

Allegations of deceitful subscriptions have dogged companies selling miracle supplements or questionable beauty products. But a rising crop of e-commerce startups combines similar tactics with legitimate goods—and legitimate investment. The founders of JustFab, a retailer backed by $249 million in venture capital, previously owned a weight-loss business called Sensa that was sued by the FTC for false advertising. Sensa and its chief executive, Adam Goldenberg, paid more than $26 million to consumers in a 2015 settlement.

Goldenberg is now the co-CEO of JustFab. After a separate legal settlement, his new flagship retail website posts 14 separate notifications about its subscription service and requires shoppers to twice affirm their decision to become a member, a JustFab spokesperson says.

JustFab gets a B- grade from the Better Business Bureau; Adore Me gets an F.

Adore Me, based in New York City, has raised $11.5 million in venture capital funding and last year landed at No. 14 on Inc.’s list of fastest-growing companies. The company’s revenue last year reached $42.9 million, almost triple the figure from 2014, according to internal figures shared with Bloomberg.

Adore Me’s founder and CEO is Morgan Hermand-Waiche, 34, a slender French expat with short-cropped nutmeg hair who is often photographed alongside lingerie models. His family owns clothing stores, and he worked with Asian manufacturers as a junior associate at McKinsey & Co.

The startup’s origin story, as Hermand-Waiche tells it, goes back to his second year as an MBA student at Harvard Business School. He was looking to buy his girlfriend high-quality, inexpensive lingerie and couldn’t find anything suitable. He launched Adore Me in 2010, and his sights are now set on Victoria’s Secret, the unrivaled lord of lingerie. Its parent company, L Brands, controls 62 percent of the $9 billion U.S. lingerie retail sector.

Hermand-Waiche insists his company’s subscription model is nothing like other services cashing in on murky recurring fees. “If you’re one of those players that try to scam people and put them into not-flexible systems where they get charged for things they didn’t order, these companies are born to fail,” he says. “They should. That’s not the way you build a business.” Adore Me, he emphasizes, doesn’t trick shoppers with its opt-out membership model: “It’s really people’s decision to go for one or the other.”

It’s a business model with a long history. It didn’t even originate online. The system was developed by an ad man trying to sell books almost a century ago—and regulators still haven’t figured out how to deal with it.

The Book of the Month Club was the 1920s equivalent of today’s disruptive online startups. Customers received a book each month in the mail for a fixed annual subscription fee, spreading new titles to book-lite corners of the country. Yet the company was struggling to curb mass cancellations and returns.

That problem ended on the morning in 1927 when Maxwell Sackheim, a founder of the book club, had an epiphany: What if he simply told customers in advance what book they would receive? If the customer didn’t respond to decline, the club would bill the person and ship the book.

Sackheim called it the pre-notification plan; others called it automatic shipment. Today it’s known as negative-option billing.

“Whatever the name,” Sackheim wrote in his 1975 memoir, My First 65 Years in Advertising, “it relies on the simple formula of sending a comprehensive description of the selection each month in advance, allowing the subscriber to say he does not care for the book—or record—or whatever the Club is selling.”

It’s a method that has since been duplicated by countless “of the month” clubs. Music fans of a certain age will most likely have encountered this business model through Columbia House, a ubiquitously advertised mail-order seller that in 1961 had 1.25 million members and sold half of its records through clubs. At its peak in the mid-1990s, Columbia House raked in $1.4 billion in annual sales by tempting shoppers with too-good-to-be-true deals—eight records for a penny!—and keeping them in ongoing subscriptions.

Columbia House subscribers received a catalog to make a selection each month. If no album was chosen, the company would automatically pick something for you—and likely something expensive, perhaps a Hootie and the Blowfish CD priced at $20. Subscribers had to opt out to exit the eternal billing cycle. The company, which still exists under new management and filed for bankruptcy protection last year, declined to comment on the conduct of previous owners.

“Columbia House had this brilliant, perverse method,” said Sasha Frere-Jones, a former music critic for the New Yorker who has discussed his time as a Columbia House employee in its heyday. “Could you ever get anyone to do that again?”

Evidently you can. The Internet has led to a subscription-service renaissance. After flash-sale startups such as Groupon and LivingSocial fell out of vogue, investors set about looking for the next can’t-miss business model. ShoeDazzle, a subscription commerce startup co-founded by Kim Kardashian, raised $40 million in 2011. Since then, venture capitalists have poured more than $1.6 billion into subscription commerce companies, including almost $200 million raised by Blue Apron and more than $114 million amassed by Rent the Runway, which is betting on a new subscription-like offering for unlimited rentals. Even Columbia House is going to return to the fray, with a plan to exit bankruptcy reborn as an online subscription service for vinyl records.

“Everything under the sun seems to have a subscription business,” says Sucharita Mulpuru, an e-commerce analyst at Forrester Research. But the subscription-retail trend might have been overhyped by eager investors. “The universe of people who want a pair of shoes mailed to them over and over again is small,” Mulpuru says.

Few investors have so far managed to score paydays. The only big sale came from Trunk Club, a men’s-fashion subscription service that was bought by Nordstrom for $350 million in 2014.

Regulators, meanwhile, are trying to keep up with potentially misleading subscriptions. The FTC tried to crack down on unfair negative-option practices as far back as 1973, requiring sellers to disclose all terms before customers subscribe. But that rule did not cover automatic renewals. Sixteen states now have statutes addressing the negative-option model. Congress also enacted the Restore Online Shoppers' Confidence Act in 2010. Federal law prohibits negative-option subscriptions unless the company:

(1) provides text that clearly and conspicuously discloses all material terms of the transaction before obtaining the consumer’s billing information;
(2) obtains a consumer’s express informed consent before charging the consumer’s credit card, debit card, bank account, or other financial account for products or services through such transaction;
and (3) provides simple mechanisms for a consumer to stop recurring charges from being placed on the consumer’s credit card, debit card, bank account, or other financial account.

Here’s how a seemingly straightforward purchase on Adore Me’s website pushes people into ongoing membership in an underwear club.

You can’t look at lingerie without first entering an e-mail address, a feat that requires passing through two different pages dedicated to advertising a deal: “First Set for $24.95,” the website declares across a backdrop of models in brassieres. The fine print at the bottom explains that the offer is only valid with a VIP Membership, offering no explanation of what that entails.

Once at the actual shopping part of the website, Adore Me opts every first-timer into a VIP Membership. The price of your purchase shows up with the members-only discount, and the checkout screen automatically rings up your initial purchase as if you’re a VIP. That’s also where you can learn the details of Adore Me’s membership model—but only by clicking to reveal an informational page.

To buy underwear a la carte, you must click a dull, gray strip of text at the bottom corner of the purchasing screen. For those who knowingly or unwittingly complete a purchase as a member, it’s all opt-out from this point on.

Now you have agreed to buy $39.95 worth of underwear each month, unless you tell Adore Me you want to skip the month between the first and fifth day of a billing period. Those who do nothing will be charged $39.95 and receive no undergarments. That happens every month until forever, unless you cancel or go on a three-month “payment vacation.” Please note: You can’t cancel your membership until after the vacation ends, when the cycle starts over again.

Members who don’t make a purchase each month will accumulate $39.95 in credit, which the company recently revamped to remove expiration. The way Adore Me CEO Hermand-Waiche describes it makes the system sound appealing. “You can use a store credit to buy anything you like anytime—it never expires,” he says.

Canceling what one customer described in an FTC complaint as the “seemingly inescapable VIP package” can be an aggravating process. “I never opted in for monthly billing,” another Adore Me customer wrote to the FTC, “and yet now it is MY responsibility to chase them down to tell them I wish no longer to be enrolled?”

Adore Me for the first time earlier this year added an online cancellation process. Previously, opting out required a telephone call during business hours. “At every turn, I was told via e-mail and web chat that I had to call the company directly,” a customer told the FTC. “I have since called them multiple times and each time am told that the wait to speak to a representative is 10+ minutes, and have been placed on hold indefinitely.”

The new online escape route isn’t frictionless. First, members send an e-mail to the company. A few hours later, Adore Me responds with a link to instructions on how to unsubscribe. Four screens and one online quiz later, membership is deactivated.

When asked if Adore Me would introduce one-click cancellations, which subscription retailers such as Birchbox already offer, Hermand-Waiche replied: “In the coming six months, what you should see is a rollout of a lighter quiz.” An Adore Me representative later clarified that the quiz would be changed only if it was identified as “a pain point” for shoppers.

The company underplays the importance of its subscription business. “We don’t care that much if it’s a VIP or pay-as-you-go,” says Adore Me COO Romain Liot. Yet he also told Bloomberg that the VIP service represents 90 percent to 95 percent of all sales.

“There’s nothing wrong with a subscription website,” says Allen, the California prosecutor, “as long as the consumer knows that it’s a subscription website.” Her fellow district attorneys have taken notice of the industry: “People are looking,” she warns. “I’m looking.”

The sixth day of each month is the busiest at the Adore Me headquarters, inside a humdrum office building just off Times Square, a few hundred feet from the spot where Maxwell Sackheim came up with his opt-out model for the Book of the Month Club. That’s the day Adore Me charges people who don’t make use of that month’s membership. When the charge goes through, people call. And they’re mad.

“They were extremely angry,” remembers Richelle Davis, who worked at Adore Me in 2014. “I’m a very calm and nice person. I would understand what they’re talking about. I would go in-depth and show them while we’re on the phone: ‘Ma’am, you had the option to subscribe or not subscribe.’ I’d apologize.”

To handle the call volume, former employees recall working double shifts, a 12-hour day with no breaks. The goal is to convince customers not to opt out of the VIP Membership, whatever it takes, according to several former customer-service representatives. Sometimes reps might offer a special lingerie deal or free panties. “Whatever we could barter or give them,” says Gabrielle Augustin, an employee who left in 2014.

An Adore Me representative says complaints have fallen to less than 1 percent of customers and that a portion of the heavy call volume at the beginning of the month reflects excitement for newly available undergarments. Hermand-Waiche attributes any issues to growing pains. He describes the call center as “our main weakness” and says it will be improved. “It’s not always easy to make millions of customers happy when you grow as fast as we did,” he says. “We’re getting there.”

To appease angry customers, Adore Me has made it easier to get a refund or cancel online and also added reminders about the opportunity to skip the membership charge for a month, including text messages. New members receive a reminder e-mail and can have the opt-out period extended by a few days.

So why doesn’t Adore Me just spell out the $39.95 monthly subscription price on the home page of the website for all to see? “The reality is, people don’t read,” says Hermand-Waiche.

Adore Me has taken a financial hit for these recent tweaks to its business model, with a 30 percent jump in refunds and a 15 percent drop in subscriptions. “The easier you make the refund process,” says Hermand-Waiche, “the more refunds happen.”