Subscription is experiencing a resurgence in the digital age. Yet the subscription model has been around for about 400 years, dating back to the sales of books and periodicals in the early seventeenth century.
Perhaps the first known direct-mail subscription business is the Book of the Month Club, which was started in 1926 by entrepreneur Harry Scherman, who arguably set the template for the current subscription-box model we see today.
Early iterations of the business began under the Little Leather Library (LLL) moniker, created in 1916 by Scherman, alongside Charles and Albert Boni and Max Saxheim, fellow members of a Greenwich Village literature group. After hearing of a tobacco company that included a volume of Shakespeare with each tobacco purchase, they were inspired to create a prototype version of Romeo and Juliet. Scherman shipped public-domain titles directly to consumers along with a selection of chocolates, a small gesture to delight customers. And delighted they were—by 1920, LLL had sold over 25 million volumes.
The seemingly simple strategy of sending an unexpected gift, message, or “ride along” is still widely used by several direct-to-customer brands, and has propelled many to the forefront of the customer satisfaction zeitgeist. BarkBox, for example, sends random toys as part of a regular monthly shipment of dog treats; and Chewy.com drove hundreds of millions in revenue not only by selling pet products, but by delighting customers with personal touches like handwritten cards—in 2017 alone, Chewy’s “Hallmark” department mailed out 5 million of them.1
After the Little Leather Library was acquired in 1923, Scherman shifted his focus to his second venture, the Book of the Month Club (BOMC). While the business model was similar in certain respects, BOMC had larger-scale distribution and a mix of classic and newly published book titles on subscription. Subscribers choosing to enrol would receive at least four books a year, chosen in advance from the catalogue.2
To keep the quality of the titles high, Scherman’s team engaged editorial experts—respected writers, editors, or journalists—to select the books each month. The curated selection provided readers with assurance that they’d be receiving recommendations from knowledgeable critics. Notwithstanding the value these critics provided, the key to the Book of the Month Club’s early success was the subscription model. By subscribing to the club, readers could get premium titles conveniently, without having to travel to a store.
Scherman’s direct-mail business managed 4,000 subscribers in its first year of operations, before climbing to 60,000 in year two. Incredibly, by the 1940s, in the aftermath of World War II, the number of subscribers had grown to 550,000. The company’s growth came mostly from books, but also from other business lines, including Music-Appreciation Records, a classical music club for adults and a predecessor to one of the biggest subscription businesses in history, the Columbia Record Club (more on them later). By the mid-1950s, BOMC had 800,000 members—more than the total number of titles in all U.S. public libraries and universities combined. After Scherman’s death in 1969, the club continued to grow under the stewardship of Scherman’s son-in-law, who later helped BOMC orchestrate its sale to Time Inc. in 1977 for an estimated $63 million.3
Scherman’s impact stretches beyond redefining marketing in the twentieth century. In fact, Scherman can be credited with introducing many literary classics to a broad audience of readers. Books like Ernest Hemingway’s A Farewell to Arms, Margaret Mitchell’s Gone with the Wind, and J.D. Salinger’s The Catcher in the Rye might never have gained the popularity they did without the Club’s recommendation and subsequent distribution to its loyal customer base.4 In a way, the book club acted as the gateway for authors to reach customers in rural areas where few (if any) bookstores existed. Interestingly, BOMC is still operating, now owned by Pride Tree Holdings Inc., and although exact membership numbers are unknown, its Instagram page has over half a million followers.
As the Book of the Month Club grew throughout the 1950s, magazine publications were also growing revenues through more efficient distribution, sales from ad placements, and increased subscription rates. After a 200-year-plus history, the magazine industry was peaking.
While the subscription model seems synonymous with magazines, it took more than a century for the industry to reach full stride. The early roots of the industry point back to English printer Edward Cave, widely considered to be the first to release a magazine, The Gentleman’s Magazine, in 1731, which contained everything from essays and poems to stories and political musings. Ten years later, the first two American publications were founded: Andrew Bradford’s American Magazine, a Monthly View of the Political State of the British Colonies, and Benjamin Franklin’s The General Magazine and Historical Chronicle.
It’s not clear which publication was the first to attract a set of subscribers, or which first monetized its operation using the model. What we do understand, however, is that the industry had trouble attracting and keeping readers. That began to change when the U.S. Postal Service was established in 1775, helping to spark the first ‘‘golden age” of magazines, from 1825 to 1850, when better distribution coincided with “a general literary boom, rapid diffusion of the new practice of paying authors for their contributions, and expanding use of copyright law to defend publishers’ exclusive rights to their magazines’ contents.”5
As magazine publishing blossomed, popular titles like Harper’s, McClure’s, Vogue, and Cosmopolitan began slashing prices to make publications more affordable for the masses. As circulation grew, so did revenue from subscribers, as well as revenue from advertising. For example, Cosmopolitan had advertising revenues of $5,000,000 from a circulation of 1,700,000 in the 1930s. These factors changed the economics of selling magazines, since the prospect of selling a magazine for less than the unit cost of production had now become a worthwhile growth strategy.
In 1953, Hugh Hefner—a University of Illinois psychology graduate who had worked for Esquire magazine writing promotional copy—endeavored to capitalize on the magazine boom, and launched a magazine of his own called Stag Party. He formed a corporation called HMH Publishing, recruited a friend to find investors (including his mother, who put up $1,000), and, after the publisher of an unrelated men’s adventure magazine called Stag threatened a lawsuit, changed the name to Playboy. The first issue, which hit shelves in 1953, featured none other than Marilyn Monroe on the cover; the picture, taken at the Miss America Pageant a year earlier, complemented the magazine’s racy centerfold photo of Monroe. The cover price at the time was fifty cents, and, as you may have guessed, the issue was an instant success—selling 50,000 copies in its first few weeks.
With photography expertise from Tom Kelley and promotional efforts that Hefner centered around Monroe, millions of male readers were hooked into subsequent subscriptions of Playboy magazine. By 1975, circulation had reached 5.6 million. By comparison, the iconic business and politics magazine The Economist, whose circulation in 1956 was similar to Playboy’s, took nearly thirty years to reach just 250,000.6 Apparently sex sells better than economics.
Playboy was also leveraging its subscription model to expand into other business lines. In 1960, the business launched a new entertainment concept called The Playboy Club, a chain of exclusive nightclubs and resorts open to paying members only. A typical club featured a dining area, living room, bar—and occasionally a casino—where, for $25 per year (about $220 per year in today’s dollars), members could hang out and be waited on by Playboy Bunnies who had appeared in the magazine—that is, if members actually visited. In fact, somewhat surprisingly, only about 21 percent of members ever set foot in a club after signing up.
For most, membership to Playboy Clubs offered a status symbol rather than any kind of tangible benefit; but for Hefner and company, the lack of membership usage helped boost the bottom line. As the chain expanded internationally, membership peaked at 750,000,7 only to gradually disappear by the early 1990s. Interestingly, in 2018, Playboy opened a new club on Manhattan’s West Side, the first in New York City in thirty-two years. Fees to this era’s version of the club start at $5,000 a year and go up to $100,000—those who opt for the top tier get some cool perks, including chauffeur services to and from the club; ten complimentary nights at a local boutique hotel; ten VIP sports tickets per year in the Playboy seats for either Giants, Jets, Knicks, or Rangers games or the US Open; and a VIP table with bottle service at Playboy events. As of late 2018, women, allegedly, had bought 45 percent of all memberships.8
Playboy’s current attempt at selling “bunnies” is questionable, given the failure of the initial chain and the brand’s positioning in today’s #MeToo era. But there are several modern-day iterations of this long-standing type of subscription model, running on the same chassis as Playboy, that are booming, including private health clubs, yoga studios, golf clubs, supper clubs, coworking spaces, and upscale business lounges.
While the core offering is different, each of these businesses operates on a member access model that relies on both analyzing subscription revenue from their exclusive enrollments and predicting “breakage”— revenue gained by a merchant through services that customers never claim (i.e., use).9 Beyond industries like insurance products, home security, and most loyalty card programs—which make a killing off customers not redeeming their points—many lifestyle and fitness clubs have made fortunes using the access model, measuring overall business health by how little their members actually use what they’ve paid for.
Take a typical gym chain, for instance. It charges on average $50 to $75/month for dreams of a slimmer waistline. The big chains and the boutiques alike all rely heavily on passive consumer behavior (i.e., breakage) to generate profit. The statistics are pretty telling. Gym chains are inundated with new sign-ups in January, driven by New Year’s resolutions to get in shape. Of the cohort of new entrants, 80 percent cancel their memberships within five months; only 20 percent use the gym consistently, while about half who sign up never even pass through the turnstiles, period.10 Gym occupancy, or lack thereof, is therefore key to the business model. In fact, to be profitable, fitness chains need about 10 times as many members as they can actually fit through the doors.11 In other words, the perfect gym customer is the one who intends to work out, pays to do so, but never does. Sound familiar?
The mix of subscription revenue and consumer laziness is big business. California-based LA Fitness logs about $2 billion in annual revenue. New York-based Equinox Fitness, which includes brands Equinox, Blink Fitness, SoulCycle, and PURE Yoga, does over $1 billion.
Although traditional private golf club memberships across the U.S. have declined since 2011, as aging baby boomers hang up their putters and five-irons, millennials are driving some impressive growth for a new generation of urban and athletic clubs, sans golf. Soho House, a group of private clubs founded by English entrepreneur Nick Jones, is one example: Jones opened the first location in London’s Soho neighborhood in 1995 and now has almost two dozen clubs around the world, from Los Angeles to Mumbai.12
Soho prides itself on crafting a membership list that values creativity over financial success; industries like fashion, media, and the arts are well represented, for example, while membership committees purge applicants in banking and law who don’t fit the image the club wants to portray.13 This filtering strategy continues to drive consumer interest and long waitlists.
Soho has over 70,000 members worldwide who pay thousands of dollars in annual dues for access to a “House,” its events and restaurants, the in-house Cowshed spas in certain locales, and more. The group posted $371 million in operating revenue in 2016 (up 20 percent from a year earlier), with about half of that coming from food and beverage sales, which of course are not included in membership fees.14
Back in the mid-1950s, another major industry was growing via direct-to-customer subscription: music. The music industry in the ’50s was like a teenager going through a growth spurt. Record labels were experimenting with the product they were selling and the way they were selling it, motivated by a desire to capitalize on the emergence of new genres—jazz, funk, and, most important, rock and roll.
At the height of rock pandemonium, a few musical front-runners emerged, such as Chuck Berry, Little Richard, Fats Domino, Jerry Lee Lewis, Sam Cooke, Ray Charles, James Brown, and, of course, a guy named Elvis, who released his first album in 1956. Mainstream music had never heard or seen anything like Elvis Presley before. His pelvic gyrations, stage swagger, and hit-parade crooning would all have significant influence on the next generation of rock and roll, and on the music industry itself. With the flowering of the postwar baby boom, teenagers, especially ones with money, represented an enormous and largely untapped consumer group for record labels like RCA, Capitol Records, and Columbia.
At the same time, the gradual takeover of smaller record-distribution networks by major labels was changing the fundamentals of the music business. Indie labels that had launched the careers of many of these budding musicians quietly began winding down operations in the face of competition from the bigger labels.15 As independents dissolved, Columbia Records began toying with new strategies and selling methods. When CBS Records formed a new direct-mail division of Columbia—the Columbia Record Club, in 1955—the new subscription club turned the industry upside down.
Columbia began as an experiment in selling music through the mail. To attract attention to the novel program, new members could choose one free monophonic record from a catalogue of jazz, easy-listening, and Broadway show titles. It was a great model that, by the end of its first year, had amassed 128,000 members. With unexpected success on their hands, Columbia management moved fulfillment operations from Manhattan to Terre Haute, Indiana, strategically located closer to major railway lines. Just two years after the move, the club was shipping 7 million records a year, and by 1963, accounted for 10 percent of the entire U.S. recorded music industry.16
By the mid-’90s, music clubs accounted for 15 percent of all CD sales worldwide.17 Columbia captured a sizable portion of the market not only by offering a vast selection of titles, but by making it easy for subscribers to get them—not unlike Netflix, which began selling DVDs through direct mail decades later. In addition to selection and convenience, Columbia also invested in perfecting, analyzing, and optimizing customer preferences. In fact, the Columbia Record Club became one of the first companies to leverage data processing equipment to anticipate changing musical tastes when they invested in computers in 1962.18 The club evolved over the years, selling various formats and later changing its name to Columbia House. At its peak in 1996, Columbia House was raking in annual profits of $1.4 billion.19
But, as Columbia House scaled up—to millions of members—so did the greed of its leadership team. The laser focus on customer acquisition that helped make Columbia House an early pioneer in subscription selling also contributed to its demise. Today, the company is among the most instructive examples for those seeking to understand where big subscription businesses fail.
In fairness to Columbia, there were some market fundamentals at play: by the late 1990s, new innovation in the form of MP3 technology and the rise of sharing software from services like Napster and Kazaa, for example, were chipping away at company market share; Columbia was also hobbled by internet-based retailers like Amazon, and big-box discounters like Walmart. But, while competition and innovation explain some of the company’s challenges, the root cause of Columbia’s failure was its brutal exploitation of negative option billing, supported by aggressive marketing tactics and a lack of customer service.
Negative option billing is the practice of providing unsolicited goods, and automatically, and often repeatedly, charging the recipient, until they cancel the service. A common example of the practice would be a traditional magazine subscription: after signing up for a fixed period, the reader is assumed to be satisfied with their subscription and can expect to automatically receive issues—unless and until they call to cancel. The tactics of Columbia House, while perhaps kosher in the early days, became increasingly questionable over time, as customer confusion around the company’s offering and billing terms set in.
Columbia House was one of the first direct marketers to throw caution to the wind on things like clear and conspicuous messaging, terms and conditions, and customer service. Columbia’s model of marketing music (and later movies) for a penny was, legally, onside, but the tactics it used to enrol new members were often deceptive and confusing, such as trumpeting “first eight albums for a penny” while downplaying or omitting the fact that customers were agreeing to receive further albums indefinitely at full price.
The “first album for a penny” incentives worked brilliantly. Dan Ariely, in his book Predictably Irrational: The Hidden Forces That Shape Our Decisions, clearly conveys why:
Most transactions have an upside and a downside, but when something is FREE we forget the downside. FREE! gives us such an emotional charge that we perceive what is being offered as immensely more valuable than it really is. Why? I think it’s because humans are intrinsically afraid of loss.... And so, given the choice, we go for what is free.
People took the bait in droves. Little did they know that as soon as they shared their credit card number, they had opted in to not only receive that first shipment of eight albums for a penny, but successive shipments—and subsequent billings at full price, which was even higher than record-store markups.20 By the time they realized they didn’t need or want the second, third, or fourth lot of CDs, it was too late; Columbia House had already dinged their card for $50 to $100. Attempts to dispute these charges were in vain—if a customer was even able to reach Columbia House in the first place.21
For years, Columbia executives got away with it. No governing body was paying much attention to how these music clubs were enrolling new customers. Regulatory enforcement by consumer protection watchdogs like the Federal Trade Commission (FTC) simply had other fish to fry; that is, until the late 1970s, when a changing and savvier consumer climate led to higher scrutiny, eventually placing Columbia House in the spotlight.22
While the effectiveness of consumer watchdogs helped in the short term, the emergence of online shopping in the ’90s and 2000s led to a spike in internet charlatans exploiting the ugly underbelly of negative option billing. Direct mailers looking to take advantage of consumer buying behavior, for example, now had a cheap new platform to advertise shady incentives to hook consumers into recurring billing contracts. And they did just that, conjuring up clever landing pages to sell all kinds of stuff, using free-trial incentives to fix customers into long-term commitments to everything from teeth whitener, vitamins, and weight-loss items (remember Açai berries?) to business opportunity scams, free credit reports, and more. It was the Wild West of online selling.
Millions fell for these scams, typing in credit card information in return for a trial shipment of a diet powder for pennies on the dollar, for example, only to realize months later—usually by the shock value of their Visa statement—that they had been swindled into a monthly shipment of Açai at full price. Online scammers selling the stuff usually had no customer service number, formal address, or general company website. As soon as they began to see customer complaint and chargeback (a formal transaction dispute initiated by a credit card issuer) levels rise, they would shut down business operations, their registered PO box, and anything else tied to the underlying corporation—just in time to flee offshore with a bag full of cash.
In the late 2000s, consumers again began flooding the FTC with complaints of these types of fraudulent, deceptive, and unfair online business practices. As a result, a number of bad apples received significant fines. In 2009, for instance, the FTC accepted a $1 million settlement from an outfit called Commerce Planet, which had been offering a “free” online auction kit to trick customers into an “online supplier” program that came with monthly fees of $59.95.23 Other FTC actions led to lawsuits that in rare cases even resulted in owner imprisonment; yet hundreds of other online merchants got away with shady business practices, vanishing without a trace to places like Panama or the Cayman Islands before the FTC could catch up with them.
The negative option billing practice itself isn’t illegal. Several mainstream industries—such as insurance, financial services, web hosting, digital music subscriptions, and other online services like dating websites and paywalled news sites, etc.—operate using the same negative option umbrella.
Which begs the question: What’s the difference between a mainstream corporation using the same billing model as the guy who’s skipped off to Panama to avoid the FTC? The answer is tied to a legit product or service, supported by an acceptable level of customer service, governed by a company whose offer terms are fully transparent and understood by the customer it’s selling to.
Customer complaints stemming from automatic billing are just as much a reality for blue chips like Verizon or Allstate as they are for online upstarts looking to build their business off the same billing model. The difference is in the company’s inherent approach to customer service and satisfaction. Great companies make it easy for their customers to reach them.
I know, you’re sitting there hemming and hawing over your cell-phone carrier and their overage charges. I’m not denying these annoyances exist. However, if you want to air your grievances, you can do it. Just call the toll-free number, and you’ll get a poor agent on the line who has to listen to you vent. And, although it may not seem like it at times, given the dizzying array of plans and add-ons, their in-house legal teams make it a priority to communicate their billing plans transparently. It is their job, in fact, to ensure consumers know exactly what they’re getting and how much they’re paying for it.
When it comes to servicing the customer, transparency is key to staying out of trouble. Problems arise when companies like Columbia House and Commerce Planet abuse negative option billing by obscuring intentions. Contentious cases often center on solicitation lost in fine print, or the misinterpretation of what’s on offer. Such was the case in the 1980s, when numerous cable companies got into trouble by ducking around required terms in order to automatically sign new subscribers up to additional tiers of service without consent, thereby ringing in substantial revenue.
In Canada, a national cable provider (as a nice Canadian, I won’t name them, but any fellow Canuck can guess who I’m talking about) provided 7.5 million subscribers seven new specialty channels—for a free “trial period”—in 2014. However, when the trial period expired, the company began billing for the channels automatically, without subscribers’ consent. At the peak of the ensuing outrage, the company was receiving 100,000 complaints a week, and several members of Parliament were swamped with calls from angry consumers.24
Concern about negative option billing is ongoing. The most fraudulent version (when recipients of wholly unsolicited products are then billed for them) is illegal in Canada; in the U.S., the FTC requires any business that offers a negative option plan to clearly and conspicuously indicate “purchase obligations, cancellation procedures, the frequency with which members must reject shipments, and how to eventually cancel a membership.”25
But most subscription companies use negative option appropriately. They are forthright in their terms and conditions, marketing and promotional material, and FAQ pages. They also usually provide customer service at above-average to exceptional levels through live agents, live chat, support forums, email, and more. As a result, these companies benefit from lower than average complaint levels, low refund ratios, and low chargebacks, while garnering higher levels of customer satisfaction.
So, what happened to Columbia House? The company was the target of a number of lawsuits alleging fraudulent business practices, ranging from hidden shipping fees to fraudulent sale of debt to unauthorized credit card charges. It pivoted to DVDs-only in 2010 but filed for bankruptcy five years later, its assets of $2 million smothered by $63 million of debt. In 2011, a nationwide class-action suit was filed against Columbia House seeking monetary damages and an injunction stopping the company’s parent, Direct Brands Inc., from the alleged business practices of unauthorized credit card charges, inability to cancel, unwanted products being mailed to homes, and several other issues.
At the time, it attributed its decline to the rise of “streaming.”26 (Nice try.) Today Sony Music owns the Columbia House trademark, and Columbiahouse.com still sells DVDs for $9.95. I think the company still has one customer in Idaho.