Auto-Renewal Revenue Is a Bad Habit Companies Ought to Quit

Consumer handcuffs are bad business. And the Federal Trade Commission is looking at action soon that would unlock them. By taking on handcuff agreements, it would require businesses to make it as easy to cancel a service as to sign up for it.

When I was negotiating deals as in-house counsel, I used to hate handcuffs. There are clauses in contracts where your supplier or partner wants the deal to renew automatically, and you can only get out of the deal once a year by sending a fax to a particular number using specific cancellation language. Hope we don’t forget to cancel—and that fax machine has paper in it—otherwise we’re stuck with this bad contract for another year.

I used to send the contracts back and tell them to take off the handcuffs. I wanted a “happy clause” instead. A happy clause is pretty simple—we’re both committed to making the deal work and communicating with each other about problems. If either of us isn’t happy with the contract at any time, either side can get out on 30-days’ notice. Simple. It pushed us both to be great partners, committed to making the deal work for each other.

I think we got more deals done because there was little downside—you didn’t have to be worried about being stuck in a nightmare deal, counting down the months until you could escape. I used to say that if the deal wasn’t working for you, we want you to move on and find something else that will work, because we care that much about you. Thinking like that got deals off to a good start.

In the consumer world, handcuffs are particularly troubling. When businesses fail to delight their customers, they often try to boost numbers by enticing consumers with great up-front deals that usually go away in a few months—making sign-up fast and easy, auto-renewing the relationship, and making it very, very hard to cancel.

We’ve all done business with those companies—we signed up online in less than five minutes, but when we went to the website to stop the service, there was no cancellation button. You have to call, but of course, they’re closed for the day. They don’t work on weekends. And on Monday, they’re experiencing unexpected high call volume. You hold for 90 minutes until you get a salesperson who does their level best to talk you out of leaving—cajoling and pleading and asking if you’re really sure and offering you a better deal to please stay. You hold firm, they put you on hold to get their supervisor, and then: disconnected.

In the FTC’s new proposed rule, if you sign up on a website, you have to be able to cancel it on that same website. Hardly a revolutionary concept, but the proposal has been greeted with howls of indignation from some in the business community, led by (no surprise) the cable companies.

They claim it’s good for customers to slow down, so they can be fully informed of the consequences of their cancellation and, of course, be offered more deals. The FTC’s proposal could cause new frustrations for customers because they have become used to protracted procedures, according to the Association of National Advertisers. Conditioned by decades of bad experiences, we might go into shock if we could successfully cancel with just a click.

If your business model depends on revenue from customers who don’t want to use your service and want to cancel, you’re relying on what I call bad revenue—revenue that isn’t really earned or sustainable. You’re in deep trouble if consumers don’t want to use your product or service, and throwing up more barriers to exit is just making things worse in the long run. Instead of working to trick customers to keep subscribing to your product or service, offer something consumers actually want or need.

And there’s considerable evidence that decades of high-friction cancellations have actually hurt business. A 2023 survey of 6,000 consumers by subscription management specialist Recurly found that ease of cancellation (84%) was the top factor in attracting new subscriptions, and 77% stated that they would be more likely to subscribe to a service if it were easy to cancel.

Online advertisers claim a click to cancel rule such as the one currently being considered would cost businesses $2.7 billion, but does that mean the rule would save consumers the same amount of money in unwanted subscriptions? And how much are businesses losing today because consumers are wary of signing up for subscriptions, knowing that breaking up, as the song goes, is so hard to do?

Expect the recently energized FTC to issue some sort of “click to cancel” rule in 2024 and perhaps, down the line, to even require businesses to provide notice to consumers who are paying for unused subscriptions.

And there’s no better time to focus on improving your customer experience, perhaps enabling them to customize their subscription to better meet their needs or, of course, making it easier for them to cancel altogether. You know the saying. If you love someone, set them free. Maybe they’ll come back to you.

Rob Chesnut consults on legal and ethical issues and was formerly general counsel and chief ethics officer at Airbnb. He spent more than a decade as a Justice Department prosecutor.

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