Columbia House: Why big subscription businesses fail

In 2011, a nationwide class action suit was filed against Columbia House (Direct Brands Inc.) seeking monetary damages and an injunction stopping Direct Brands and its business practices on the basis of unauthorized credit card charges, inability to cancel, lack of customer service, unwanted products mailed to homes and several other alleged issues.

In 2015, Rolling Stone published an article titled “Columbia House Files for Bankruptcy, Blames Streaming.”  The company’s assets at the time, valued at $2 million, were smothered by the $63 million it owed to creditors.

The failure of Columbia House, once considered a foremost leader in music subscriptions, in fact, has nothing to do with streaming. Rather, the storied fall from grace provides a stark example of a subscription failure rooted in customer acquisition greed.

Back in 1955, the Columbia Record Club, turned the music industry upside down when it launched. Tied directly to this pivotal decade in music, Columbia’s one free monophonic record incentive provided the perfect hook to get consumers on board the new subscription service. 

By the end of its first year, the Record Club had attracted 128,000 members. Two years later, it was shipping 7 million records to subscribers. Soon, the club accounted for 10 percent of the recorded music industry.

Not unlike Netflix which began decades later selling DVDs through direct mail, Columbia too was investing early in analyzing and optimizing for customer preferences. In fact, Columbia Record Club was one of the first to leverage data processing and computers to anticipate changing musical tastes.

But, as Columbia House (its rebranded moniker) scaled to millions of members by the mid 1990’s, the leadership team shifted its focus solely to the front-end funnel, and away from the customer; making the club not only an early pioneer in subscription selling, but also a business case in subscription failure.

While competition from Napster, Kazaa, and Walmart in the late 1990’s explain some of the challenges, the root cause of Columbia’s demise stems from its aggressive incentivized marketing tactics, lack of customer service, and brutal exploitation of negative option billing - a practice whereby a customer is provided goods or services automatically, and charged accordingly on a recurring basis.  

Most subscription companies use negative option billing appropriately. They pay attention to marketing and promotional material, the communication of billing terms, and overall customer service and satisfaction. Issues arise however, when businesses, like Columbia House, ignore these pillars.

Columbia’s opaque incentivized marketing tactics, such as the famous “first album for a penny” worked brilliantly as a front-end hook; but caused all kinds of customer satisfaction issues on the back-end since important offer terms were purposefully buried in the fine print. As a result, thousands of customers who fell for the trial incentive didn’t actually understand what they were signing up for.

By the time a customer realized they didn’t want the high-priced second, third, or fourth lot of CD’s, Columbia House had already dinged their credit card multiple times. As complaint levels increased, attempts from consumers to dispute these charges went unresolved.

For years, Columbia got away with ignoring the backlash from its subscriber base, because consumer protection watchdogs like the FTC, had prioritized other mandates over consumer rights efforts. That is, until the emergence of online shopping prompted the protection agency to seek out not only Columbia House, but thousands of other online charlatans selling all kinds of stuff using similar free trial hooks - from teeth whitener, and weight-loss items (remember Acai berry?) to business opportunity scams, free credit reports, and more.

As consumers flooded the Federal Trade Commission with complaints of fraudulent, deceptive and unfair business practices online, the agency began levying the bad apples with significant fines, lawsuits and in rare cases, imprisonment. Columbia House soon became public enemy number one among online music services.

Whether it’s a music service like Spotify, or a traditional cable provider, the Federal Trade Commission now takes just about every subscription model seriously, requiring any service offering a negative option plan to clearly and conspicuously indicate purchase obligations, cancellation procedures, and related terms and conditions. Failure to do so, means harsh punishment.

While several industries operate under the same negative option umbrella, the companies who stay out of trouble have learned a lesson from Columbia House by striking a balance between marketing and acquisition, customer service, and overall customer satisfaction.