Columbia House of Horrors: How Not to Run a Subscription Business

Before the days of iTunes, Spotify and myriad other streaming services, access to music was limited by your ability to get to your local record store. If you were unfortunate enough to live in a cultural wasteland where there wasn’t even a record shop, you were really out of luck.

Enter Columbia House Records, a mail-order music service that holds a special place in the hearts of many of us who grew up in the 1990s, ’80s and, yes, ’70s! Sign up for an introductory deal and, for a mere penny, Columbia House would send you the albums (and later, 8-tracks, cassettes and CDs) of your choice. Journey? Britney? Eminem? It didn’t matter: Columbia House wouldn’t judge. You just made your picks and then eagerly awaited the mailman’s delivery.

Columbia House was founded on a premise called “negative option.” Rather than trying to entice consumers to want to make purchases and building a business around their relationship with their consumers, it shipped by default and made consumers literally pay the price.

But after decades of dominating the mail-order music space — pulling in as much as $1.4 billion in sales in its heyday — Columbia House filed for Chapter 11 bankruptcy late in 2015. While some of the blame for Columbia House’s dissolution can be placed on our changing trends in media acquisition (read: Spotify, Netflix, niche OTT media providers and more) and stiff competition from Amazon and other online retailers, I believe that much of its eventual downfall stemmed from mismanagement of customer relationships.

According to a documentary called “The Target Shoots First” by filmmaker Chris Wilcha, a former Columbia House employee, the company was founded on a premise called “negative option.” Basically this meant that, after your initial penny purchase, the company would continue to ship products (and charge for them), until you explicitly said “No!” Rather than trying to entice consumers to want to make purchases and building a business around their relationship with their consumers, it shipped by default and made consumers literally pay the price.

Another case in point: AOL’s 2.1 million users who still pay $20 a month for their outdated AOL dial-up service

In many unfortunate ways, this negative-option model has foreshadowed the future of much of e-commerce in general, and subscription retail in particular. Consumers get sucked into providing their credit card information for a discounted product or free trial and then, when they fall to cancel in time, they continue to get billed. Another case in point: AOL’s 2.1 million users who still pay $20 a month for their outdated AOL dial-up service. These AOL customers surely aren’t shelling out for the “convenience” of their painfully slow dial-up service. It’s simply habit. Sadly, so many companies, like AOL, merely rely on the fixed habits of customers and do nothing to actively encourage adoption and retention.

We’ve recently seen companies like Fabletics (a Lululemon competitor fronted by actress Kate Hudson) and Adore Me (designer lingerie) come under fire for poor management of their subscription businesses. Unclear billing practices, difficult cancellation processes, poor communication — these subscription retail issues (and customer complaints) all flow from this idea of the “negative option” model.

Companies are only going to succeed in this business if they avoid these four critical mistakes:

Building your business model on the hope that customers forget to cancel

How sound a business model is that? Turns out, not very. For a subscription business to succeed, it needs a new model. The focus needs to be on creating a truly great subscription experience that results in long-term, recurring subscriber relationships — not just crossing your fingers in the hope of passively warding off churn. While 11 albums for a penny was a great deal, the marked-up record prices you had to pay to fulfill your Columbia House contract were decidedly not.

While 11 albums for a penny was a great deal, the marked-up record prices you had to pay to fulfill your Columbia House contract were decidedly not.

This new model requires a shift — and new metrics to measure success. Upselling, cross-selling, retention and subscriber renewal become at least as important as registering new subscribers. Successful companies that have adjusted to the demands of the subscription economy look at usage levels, investigate how subscribers are engaging with their offering and react accordingly to encourage adoption and retention. The goal is to give subscribers what they want, to embed the subscription into the lives of subscribers, to make the subscription essential.

No transparency into subscription management

Columbia House gave many teens their first brush with credit issues, by holding them to contracts they didn’t even know they’d entered into with their penny purchase. This was a mistake that ultimately backfired on Columbia House, making it the victim of mail fraud (with people making up fake accounts to take advantage of the deals) and unfulfilled contracts.

To avoid ill will and defaulted contracts, transparency needs to be the thread that runs through a subscription business.

To avoid ill will and defaulted contracts, transparency needs to be the thread that runs through a subscription business. At the outset, customers need to understand that when they sign up, they are in fact agreeing to an ongoing subscription for which they will be charged. Then this transparency needs to be maintained throughout the entire subscription experience. Subscribers need to know exactly how much they are paying, how frequently, and for what immediate and long-term benefits. And they need to be informed as to how to cancel their subscription without having to jump through hoops. Clear invoicing, self-service subscription management and seamless payment functionality are key.

This is where both Fabletics and Adore Me have run into trouble. Despite Adore Me’s insistence that its model is transparent and that it is very clear with customers about their opt-out options, cancellation process and refund policy, its “F rating” with the Better Business Bureau tells a different story. Likewise, Fabletics’ confusing membership model and complicated cancellation process have scored it more than 500 164 closed customer complaints to the BBB, countless condemning tweets and untold damage to its brand.

Running a subscription service like a shipping service

While you can “subscriptionize” nearly anything (and we are definitely moving in that direction with monthly bacon deliveries, connected floors and even subscription cow dung), that doesn’t mean you just slap a monthly price and a stamp on a product, ship it and you’re done. A subscription service changes just about everything, especially your relationships with your customers. If you don’t commit to the shift — changing your core DNA, your business model, your day-to-day operations — then it’s not going to work.

You can “subscriptionize” nearly anything (and we’re definitely moving in that direction with monthly bacon deliveries, connected floors and even subscription cow dung), but that doesn’t mean you just slap a monthly price and a stamp on a product, ship it and you’re done.

Even Columbia House, for a time, had a creative team curating music and neatly packaging it in its catalog. Better yet are companies that don’t just consider their subscribers when building marketing campaigns, but who build subscriber-focus into the entire business-development process. Whether satisfying an ongoing need like GoodMouth, offering convenience and value like Dollar Shave Club, or simply delighting subscribers with happy surprises based on their personal preferences, like Birchbox, a subscription retail company that truly focuses on its subscriber will thrive.

Prioritizing the product over the customer experience

I saved the worst for last: Putting the product first. In some ways, this offense underlies every other issue. Subscription retail businesses can’t just be product pushers. No matter how cool or well-curated or convenient your offering, this model can only get you so far. More than 60 years after Columbia House was started, it seems that many subscription-retail businesses still don’t get this point. They have no idea how to sell a great customer experience — not just a product — and how to capitalize on the potential for a seamless customer experience.

More than 60 years after Columbia House was started, it seems that many subscription-retail businesses still have no idea how to sell a great customer experience — not just a product.

There have been recent reports that the new owner of Columbia House (who purchased the flailing business at the bankruptcy auction in 2015) is looking to revive the brand. The solution? Vinyl. While I don’t know if old-school vinyl records are the answer, I think they may be on the right track: Actively managing the subscriber relationship by looking closely at what consumers want and building a business around providing more consumer options and a better customer experience.

Ultimately, what will decide the success of the resurrection of the Columbia House brand isn’t vinyl, but this relationship with its subscribers and prioritizing the customer experience. If it commits to providing something that will truly captivate subscribers, then it may well be back in business — and we may all find ourselves, once again, happily ordering 11 records for a penny.

Tien Tzuo is co-founder and CEO of Zuora, which is building the next-generation commerce platform with subscription-management software that has enabled 21st century businesses around the world, from startups to enterprises in any industry, to launch and monetize any subscription products and services. Reach him @tientzuo.