Will Cranky Customers Crush Your Stocks?
In the drive to build sources of recurring revenue, companies have turned to automatic renewal to help retain customers. But lately, the practice has gotten a lot of criticism from irate consumers, who argue that some businesses have gone too far. If these customer complaints begin to color public opinion of the offending companies, those businesses' shares could ultimately suffer.
Getting clubbed by customers and the courts
While some shareholders might applaud companies that aggressively pursue customer dollars, others may rightly worry about repercussions.
Last year, several state attorneys general launched a still-ongoing investigation into Sirius XM Radio (Nasdaq: SIRI ) for its allegedly aggressive automatic renewal practices. The magazine giant Time Inc., the division of Time Warner (NYSE: TWX ) that publishes Sports Illustrated , People , Fortune , and more, angered enough customers to end up settling a multistate investigation back in 2006. Two months ago, DIRECTV (Nasdaq: DTV ) also settled a multistate attorneys-general investigation into pay-TV auto-renewals, while McAfee (NYSE: MFE ) and Symantec (Nasdaq: SYMC ) settled with New York Attorney General Andrew Cuomo over software subscription renewals.
Whatever the outcome of such inquiries, red flags like these can generate bad press and put shareholders at risk.
Why automatic renewal isn't automatically bad
We've become a nation focused on convenience. There are drive-thrus now not only for coffee and fast food, but also for pharmacies and even dry cleaners. Naturally, we're also offered automatic renewals when we buy various items.
These renewals are primarily convenient for the vendor. Unless we bother to stop the cycle, a task which many people will procrastinate, we'll keep getting charged. The company doesn't have to chase customers for payments -- they just happen automatically.
Still, automatic renewals can be a good idea, as long as they apply to products or services we want. They save us the hassle of paying the bill, including possible postage. We can run into trouble, though, if the credit card on file with the company expires. Frequently, a company will offer a heads-up when it's billing time, and let you know if there's a problem with your card. But in some cases, unpaid charges have led to collection agencies and possible demerits on customers' credit reports .
As investors, Fools should keep a close eye on the kind of investigations and settlements that spring from autorenewal programs. As a consumer, you should keep equally keen tabs on your own autorenewal agreements, to keep your own financial good name from taking an unexpected hit.
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