DEFINITION of ‘Negative Option Deals’
A dubious business practice that involves supplying a typically new product or service on a recurring basis to a consumer even if he or she has not asked for it, and then continuing to do so unless the consumer specifically declines it. Negative option deals became infamous across North America in the 1990s because of the marketing tactics employed by cable-TV companies, wherein consumers were billed for cable-TV channels they had not asked for, and then given the runaround when they tried to cancel. Negative option deals are viewed poorly by most people because they view it as being bilked by companies that engage in them.
INVESTOPEDIA EXPLAINS ‘Negative Option Deals’
Despite the consumer backlash that inevitably arises when news surfaces of a prominent company using negative option tactics, such deals are not uncommon. The Federal Trade Commission (FTC) identifies four types of negative option plans:-
- Pre-notification negative option plans: Used by book and music clubs. In such plans, sellers send periodic notices offering products. If no action is taken by the targeted consumers, they are charged for the products that the sellers continue to send to them. The proliferation of digital distribution for books and music means that these plans are probably on the decline.
- Continuity plans: In such plans, consumers agree in advance to receive periodic shipments of goods or provision of services, which continues until they cancel the agreement. Credit protection schemes fall in this category.
- Automatic renewals: Typically used by marketers of magazines and print publications. A consumer’s subscription is automatically renewed upon expiry unless the consumer cancels it.
- Free-to-pay trial offers: Consumers receive goods or services either free or upon payment of a nominal fee for a limited trial period, after which they are automatically charged a higher fee unless they cancel the offer or return the goods/services. This is an increasingly popular method of negative option marketing, presumably because there will always be a significant proportion of consumers who are lured by an irresistible free offer and forget to cancel once the trial period ends.
Other negative option deals identified by the FTC include upsell and bundled offers. In upselling, a consumer receives a solicitation for an additional product or service after completing a primary transaction, such as balance protection on a credit card that has just been activated. With a bundled offer, two products or services are packaged together and cannot be purchased separately.