In my consulting career, I have been absolutely blessed to work with some incredible clients. Jason Schmidt, Founder of Outward Ventures is one of them. You can read more about Jason and Outward Ventures at the bottom. He wrote this week's blog, and I am grateful for him for not only being a great client with exciting things in the works, but for being willing to share his expertise with me (and the rest of the industry).
*Disclaimer: This article does NOT represent official legal advice.
The widespread availability of user-friendly online platforms to set up direct debits coupled with the preference of consumers to automate their bill-paying has given rise to what may be the golden age of auto-debited subscription services and memberships. With this trend, the fitness industry has largely moved away from fixed-term contracts with early termination fees in favor of flexible, subscription-like models which typically require a member to cancel to avoid future automatic charges. Open-ended subscriptions or memberships that require a cancellation to avoid continued charges are called “negative option offers.” The Federal Trade Commission (FTC) has finalized a new regulation concerning negative option marketing called the “Click to Cancel Rule,” which will impact how all climbing gyms in the U.S. enroll and allow members to cancel their subscriptions.
How Did We Get Here?
Many businesses, perhaps understandably, have started to take advantage of the ‘set it and forget it’ convenience of automatic bill pay, seizing upon the opportunity to capitalize on consumer laziness, delayed action, or forgetfulness by making their cancellation processes more elusive, burdensome and time-consuming.
A study in 2022 found 42% of consumers have forgotten they were still paying for a service they no longer use, and that, on average, consumers underestimated what they spend on monthly subscriptions by $133.1 What’s more, it is estimated that the failure to cancel unwanted subscriptions can increase a subscription business’s revenue by 87% more than if they created no barrier to cancellation at all. Combine that with the data showing that when people need to make an active decision about whether to renew a subscription (e.g. when the credit card on file expires and they’re asked to provide a new one) they cancel about four times as often as during other months, and the amount of effort required to chase down and validate every recurring charge, it’s no wonder that an entire industry has formed around assisting customers in identifying, managing and cancelling their subscription services. It seems like every Podcast I listen to lately is interrupted by an ad for one of these services (ironically offered on a subscription basis).
After receiving an average of 70 consumer complaints per day about difficult cancellation processes, the FTC issued a final regulation that imposes standards on how businesses must position these negative option offers and a mandate to make cancellation easier.
In its commentary on the final rule, the FTC noted that gyms and fitness clubs were some of the most frequently reported perpetrators of unreasonable cancellation policies. Some examples of these policies included requirements to come into a gym to cancel in-person regardless of factors that would render that burdensome, such as if that member moved to another state; obligation to speak to a manager or other designated individual during business hours; or burdensome notification obligations like sending a certified letter to corporate HQ a certain number of days in advance. I once had to cancel a big box gym membership in the building of a company I no longer worked for, and was forced to leave the gym to get a notarized copy of a signed letter stating my intent to cancel before they would agree to stop charging me.
While it’s true the climbing industry specifically hasn’t developed the reputation that many of the big box gyms and major fitness franchises for creating these comically difficult hoops to jump through, when the new rule takes effect about six months from now, it will establish a minimum standard for how we as gym owners structure our memberships and the ease with which we permit cancellation, but spoiler alert compliance is not that hard.
Key Points of the New “Click to Cancel” Regulation1. Provide a Simple Cancellation MechanismYour gym must provide a simple, easy-to-find cancellation mechanism that can be accessed through the same medium members used to sign up. For example, if a member enrolled online, they must be able to cancel online without having to interact with a live or virtual representative. However, if you only permit in-person enrollment, like most climbing gyms, the regulation requires that you offer members the ability to cancel over the telephone (or a similarly easy medium that does not require them to effectuate cancellation in-person). The standard is that the cancellation process cannot be materially more burdensome that enrollment.2. Make No MisrepresentationsIt is now a violation for gyms to misrepresent any material fact about the terms of membership, including the enrollment terms or cancellation process and policies. This ensures that members fully understand what they are signing up for.3. Disclose Important InformationGym owners must clearly disclose all material billing terms before obtaining any billing information from members. This includes:
4. Obtain ConsentBefore charging members, gyms must obtain their express informed consent. This consent must be separate from any other part of the transaction and must be clearly documented. Gyms must keep records of this consent for three years, unless they can prove that their system makes it impossible to complete enrollment without proper consent.5. Relation to State LawsIt’s important to note that these federal regulations do not supersede state laws unless they are inconsistent. The federal regulation is the minimum requirement, but state laws providing greater protection than these federal rules will still apply.6. Effective Date and Penalties for Non-ComplianceMost provisions will take effect 180 days after its October 16 publication in the Federal Register, except that the prohibition on misrepresentations takes effect 60 days after publication. The FTC is empowered to impose penalties reaching as high as $51,744 for each violation, which does not include penalties available under state law or litigation exposure to impacted consumers. |
What Should Climbing Gym Operators Consider?
Gym owners invest heavily in marketing plans, tech tools, and operations processes that are designed to eliminate obstacles and reduce as much friction as possible in the member acquisition process. Given that memberships typically account for upwards of 50% of total revenue and almost all regularly recurring revenue, member acquisition and retention are undoubtedly two of the most critical drivers of sustained success when running a profitable climbing business. As business owners, often representing the interests of our own investors who expect us to drive profitable results, we’re laser-focused on putting our time and energy into the areas likely to drive the greatest return on those investments.
An obvious benefit to adopting a month-to-month, open-ended membership model—as opposed to a term contract or a large pre-payment—is it takes a ton of pressure out of the sales cycle by reducing the gravity of the purchase decision felt by potential members during enrollment. Instead of having a contract-based conversation that invariably invites questions from potential new members about cancellation and the consequences of doing so, a flexible model keeps the focus on the excitement of joining the community and eliminates the need to discuss the end of the relationship just as it’s beginning. After all, pre-nups are polarizing.
With that barrier of entry (and exit) lowered, we can and should, shift more of our focus and effort to member retention, an area where we have more control over our destinies. Most retention efforts are an investment in one of two things: convincing members to stay or creating barriers to them leaving. It’s quite easy and rational, though I’d argue lazy and short-sighted, to ensure the enrollment process remains at a V0 while increasing the difficulty of cancellation as high as we can get away with.
I started this article suggesting that it could be more profitable and effortless to build barriers to cancellation instead of making it easy. For every new regulation there are sure to be a few loopholes to avoid compliance, and there will certainly be challenges to this rule’s validity in the judiciary which may lead to its reversal. However, you may wish to consider the long-term benefits to your business and community, especially when you’re a brick-and-mortar business in a community with a finite number of potential members. Sometimes people move or suddenly lose their income – do we need to put them through a time-consuming obstacle course on top of that? Can your business afford that kind of online reviews that emerge from treating people that way? For some businesses, the short-term benefit to trapping people into unwanted memberships may be worth the reputational risk, but that is probably not the case for most of your climbing gyms.
A streamlined cancellation policy be used to immediately build trust and transparency with every new member, a statement about your values which tells members that you are there for them and not just their money. More importantly, it can also enable you to use cancellation conversations to improve member retention and community engagement. If you look at cancellation as a symptom and not the problem to be solved, you have an opportunity to find creative ways to reengineer your cancellation process to glean honest and valuable insights about where you may be falling short in satisfying your members’ needs instead of losing that opportunity by making those cancellation conversations painful and combative.
New regulations are always a bit painful to deal with, and the immediate cost is often disproportionately borne by small businesses. As a gym owner, it’s important to remember you have agency and creative license to adjust your business practices and membership structure to what works best for your community within the bounds of the law. That usually means you have far more solutions than you may immediately intuit in the face of a new regulatory obstacle. In relation to this new rule, you can disincentivize membership cancellation in many other ways while still complying with this new rule. You can build retention into your membership pricing structure on the front end, such as by locking in monthly fee at a particular rate until cancelled (at which point reenrollment is at the prevailing rate). You can also do so during the cancellation process by making retention offers to those attempting to cancel (e.g. offer a 20% discount for continuing another 6 months; offer free programming for the next month, etc.). While making this rule, the FTC was considering an explicit limitation or prohibition on retention offers made during cancellation or requiring an annual notification to remind members of the negative option’s existence, the final rule does not contain either restriction. You can continue to make retention offers as long as you don’t make the cancellation process more burdensome than the enrollment process.
In our industry, where almost all enrollment is in-person, it is unlikely a telephone cancellation process that includes retention offers would cross that line. Just ensure your employees fielding those calls are instructed to respect a member’s intent to cancel and are empowered to effectuate that cancellation.
Overall, this regulation does nothing to really inhibit your ability to manage your climbing business successfully—it simply creates a minimum standard of consumer protection that many of us will gladly welcome ourselves as consumers who have very little time to manage our fifty other subscriptions.
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About Jason Schmidt and his company Outward Ventures
Jason Schmidt is an accomplished corporate attorney, currently based in South Carolina, who has spent the last 12 years of his practice as in-house counsel providing strategic legal advice to major multinational corporations in the technology, manufacturing of consumer products, grocery retail, and financial services industries on a variety of legal and regulatory matters, including those related to complex commercial transactions, litigation & risk management, intellectual property rights, privacy & data security, and construction & development projects. Jason is the owner and creative director of Outward Ventures, an upstart company whose mission is to develop and assist others in the development of facilities, events, and partnerships that connect people with human-powered outdoor adventure.
