
JustFab: The Billion Dollar Startup with a Dark Past - nikunjk
http://www.buzzfeed.com/sapna/justfab-the-billion-dollar-startup-with-a-dark-past#.wfgpk3DY5
======
jmagaro88
This kind of billing scheme is actually incredibly hard to pull off these
days. Although few laws have been passed to mandate anything, Congress has
pressured Visa and MasterCard to crack down hardcore on chargebacks (disputed
transactions). If you receive over 100 chargebacks in a month, current Visa/MC
regulations stipulate that you must keep the chargebacks to less than 1% of
your total transactions. If you go over that even for one month, you get fined
an exorbitant amount for every single chargeback over 1%.

Getting fined is usually enough to get you thrown off your payment processor
and added to something called the MATCH/TMF list, which you never want to be
put on. Once you're on that list, you're completely and utterly fucked.

If you are terminated by one payment processor due to excessive chargebacks,
and you try to get a new account with another payment processor, they first
run a query on... you guessed it, the MATCH list. If you pop up on the list,
every single legitimate payment processor will turn down your application "so
fast it will make your head spin" (to quote a certain presidential candidate).
How long do you stay on the MATCH list, you might ask? A minimum of 5 years,
although I have heard from some people that you are on it for life. Basically,
a MATCH listing blacklists you so you can likely never get a credit card
processing account ever again.

HOWEVER... there are so-called "high risk" payment processors who
"occasionally" will take MATCH/TMF merchants once you have been on the list
for 6 months or more. But, it involves some luck and it will cost you.

Most mainstream payment processors like Chase Paymentech will charge you fees
based on a pricing structure called "interchange plus," which is the base rate
that goes to the credit card brands (Visa/MC) plus a padding fee of 25 basis
points or less that goes to the processor (Chase). Depending on the types of
credit card that your customers use, interchange ends up somewhere around 2 -
2.25%. But most "high-risk" payment processors won't even entertain the
thought of giving you an account without charging at least 250 basis points
plus interchange on a reasonably good account! But most of the time, they just
abandon "interchange plus" altogether and charge you based on a 3 tiered
structure (low, mid, and high rate). This allows them to pad the bill even
more, of course. Not to mention that a whole mess of other fees are padded, as
well, leaving you paying at least 6.5 - 7% per transaction when it's all said
and done.

Oh, and I neglected to mention that if you expect to still accept Visa/MC, you
still need to abide by their rules. So your options are: (a) get your
chargebacks down to less than 1% of your total transactions, or (b) get less
than 100 chargebacks per month. If you're a tiny operation, it's a little
easier. You need to improve your customer service so that fewer customers
dispute transactions. As long as the total value of your disputes is less than
3% of your total monthly revenue, you can usually fly under the radar. But if
you're a small or medium sized company with 25,000+ transactions per month,
you need to do some major surgery to your business model to stay at less than
1% chargebacks at all costs, and probably less than 0.75% so you have a little
buffer in case your customers get a little trigger happy on the chargebacks in
a given month. That basically takes subscriptions of any kind off the table,
let alone "free trial" with autoship.

Which brings me back to my original point: a "free trial" with sneaky, fine-
print autoship is actually INCREDIBLY difficult to pull off in this day and
age. I am utterly baffled as to how JustFab, let alone Proactiv, the worst
offender of them all, can pull this scheme off without getting MATCH listed.
It especially makes no sense how JustFab has gotten away with this because it
sounds like they have been sued left and right by private parties and the
government for years. I can only postulate that they bring in such incredible
amounts of revenue that Visa/MC and their payment processors simply turn a
blind eye to it.

~~~
DanBlake
The way that these business's get past those regulations is pretty easy
actually. They have multiple (and when I say multiple, i mean hundreds if not
thousands) of payment 'accounts' (I think they are called pids) so if one of
them gets killed it does not effect the entire business.

The other sneaky thing I heard some were starting to do was to determine if a
card is a credit or debit card- You cant chargeback on a debit card so they
treat those users worse.

The one thing I dont understand is the making it difficult for people to
cancel via phone. Chargebacks cost money, so almost all of these guys give
100% refunds to anyone who calls. Not doing that seems stupid.

Its similar to back in the ringtone days how the providers would have hundreds
of short codes, so that when some of them blew up, it wouldnt effect the
entirety of the business.

~~~
omarchowdhury
Do you have any sources for: 'You cant chargeback on a debit card'?

~~~
DanBlake
Cant is the wrong word, my fault. 'much, much more difficult' would be
appropriate.

~~~
jmagaro88
That's not actually correct. The process of charging back on a debit card is
very similar to charging back on a credit card.

------
nashequilibrium
The last part of this complaint is really scary:

"I signed up to get these shoes and didn't realize that they charge if you
don't 'skip the month'. The first time I called and they refunded my money and
said emails are sent monthly to remind customers to skip the month. Well the
emails came for a few months and then they stopped so of course I forgot and
was charged. I tried getting a refund and they said no so I had to use the
credit. I tried cancelling the membership and my call never went through and
when I started an online chat and told the associate the reason for my
chatting with her was to cancel she disconnected us so I couldnt. After that
my bank froze my card for some fradulent activity and issued me a new card
with a new number and everything and so I thought the nightmare with this
company was over. Well they charged me again and I called asking how they got
my card number and they said they have a contract with a third party member
that is able to get the details of my new card and that I agreed to allow that
to happen when I signed up. Needless to say I figured out how to bypass the
long phone prompts and was able to finally stop my membership with this
company. They are ridiculous and should be out of business with the way they
run things. "

~~~
jeffmould
Had a similar thing happen with one of my cards that got stolen. My bank
canceled the card and sent me a new one. While no more fraudulent charges went
through after that, I was puzzled when my automatic charges continued without
failure. My bank told me that since the account was not closed and reopened,
they just sent me a new card with a new number on the same account, thus only
updating the same account. When this happens some processors receive your new
card details and automatically update their records. I know Stripe does,
although I don't know if they do it for both the number and expiration date,
or just the expiration date. Either way, it is scary flaw in the banking
system. ([https://stripe.com/blog/smarter-saved-
cards](https://stripe.com/blog/smarter-saved-cards))

~~~
aproductguy
It's definitely feature, not flaw; think of all the lost revenue from
merchants/acquirers/issuers/associations/etc when a card needs to be
legitimately replaced (e.g. updating your Netflix subscription is the last
thing on your mind if you lost your wallet). Full disclosure: currently
working on a product that does this very thing.

~~~
6stringmerc
I can agree with your reasoning, and I see the value for all parties involved
for a relationship to not be disrupted.

Personal story time:

Where I live, the local toll authority has a very bad reputation for their
tactics of enforcement (surprise). Well, following the TJMaxx hack, my
financial provider saw I shopped there during the window, cancelled the card
and got me a new one. Very cool. I updated as many of my accounts as I could
remember. Forgot the toll authority, whoops.

They send me a bill in the mail somehow turning 35 unpaid tolls into a fee of
$700+ dollars. I wrote them explaning that in good faith I had it on auto pay,
and I would be happy to pay the tolls, 1 late fee, and 1 processing charge. A
total of ~$70.

They waited until the absolute last day to respond (according to postmark),
which meant by the time I got their letter telling me "NO!" they had already
sent my information to collections. Eventually a collection letter showed up.
I responded in writing noting that the debt was not valid as written ($700+)
and if they got the number right, I would pay it...never heard from them
again, and it never showed up on my credit report.

Anyway, the feature you describe is good for businesses, but when some
businesses act shitty like that toll authority, the feature benefits the
consumer in a clear way.

~~~
intopieces
Are you by chance a Texas resident? The Texas Tollway system is a mess, and
they recently drew the ire of the government for it.

------
morgante
In case anyone else was confused, JustFab is not in fact the same company as
Fab (despite their similar names, founders named "Goldenberg" and "Goldberg"
respectively, and unsound business models).

Fab:
[https://en.wikipedia.org/wiki/Fab_(website)](https://en.wikipedia.org/wiki/Fab_\(website\))

JustFab:
[https://en.wikipedia.org/wiki/JustFab](https://en.wikipedia.org/wiki/JustFab)

~~~
mozumder
Crazy. Was thinking the same.. "Fab is back alive now as JustFab?"

~~~
pavornyoh
I thought they were the same company - Justfab & Fab.

------
nugget
Businesses like this depend largely upon forgetful users and credit card
rebills to be viable. Successful user acquisition comes down to how small/hard
to read/hard to find that rebill disclosure can be made without getting sued
by the FTC. Smartest thing these guys ever did was recruiting Kate Hudson to
be a celebrity spokesperson for the Fabletics brand, which threw a lot of
regulators off and bought them some initial air cover. But at the end of the
day it's the same business and they will eventually be held accountable to
reasonable standards.

~~~
arbuge
Indeed. Another example:

[https://www.ftc.gov/news-events/press-
releases/2014/11/ftc-i...](https://www.ftc.gov/news-events/press-
releases/2014/11/ftc-illinois-ohio-stop-scheme-offered-free-credit-scores-
then)

The FTC fines seem to be quite affordable to these players, who may just see
them as a minor cost of doing business. Sensa for example had sales of $300m,
fines of $26m. The example above has annual sales of around $250m. The profit
margins on the sales numbers for these kinds of products are very high too.

------
tptacek
_Sensa, oddly, is still hailed as a Goldenberg and Ressler success story on
JustFab investor Matrix Capital’s website_

In case you're wondering, I'll save you a trip to Archive.org; here's what
Matrix Partner's website said before they memory-holed SENSA:

 _The pair became fast friends, and when Intermix was acquired by News
Corporation in 2005, Don and Adam were quick to start their own company. In
2006, they created an e-commerce brand incubator platform called Intelligent
Beauty. The company became the home to SENSA, a weight-loss system based on
groundbreaking research from Dr. Alan Hirsch, and DermStore, a service created
by a board certified dermatologist who wanted to provide accurate skin care
information and qualified skin care products online._

------
burger_moon
Here's a previous discussion about JustFab from a couple years ago when they
accepted their series c funding.
[https://news.ycombinator.com/item?id=6455391](https://news.ycombinator.com/item?id=6455391)

An investor even chimes in to defend the company.

Similar topics discussed in there as are in this one. This ride doesn't end.

~~~
mintplant
Direct link to the subthread where the investor jumps in:

[https://news.ycombinator.com/item?id=6455575](https://news.ycombinator.com/item?id=6455575)

~~~
MichaelGG
Amazing. He doesn't event really defend it - he flat out admits this is what
they do. The only contention he has is that it should be obvious that it is
the case that they'll charge you if you aren't careful to unsubscribe between
certain days of the month.

------
FireBeyond
Is this the same company who about a year ago was copping a lot of flack
because one of the founders was jetting back and forth between US and Europe
first class every week to make sure he got / kept his United Global Services
membership while they were laying off staff?

~~~
FireBeyond
It's not - replying to myself. That was Bradford Shellhammer of Fab.com before
it imploded.

------
dreamdu5t
Fraud plain and simple. The executives should be in jail. Fucking weasels.
They simply pay the government off to keep defrauding people. The VCs are
happy to take their cut and enable them as well.

------
briholt
> [JustFab] was valued at $1 billion by investors, making it a “unicorn,”
> Silicon Valley’s most coveted achievement.

Rookie mistake. The most coveted achievement is to _exit_ for over a billion
dollars.

------
chrissnell
Did these VC firms not do their due diligence on Goldenberg and Ressler or did
they just not care? I find it hard to believe that they secured $300MM in
funding with nobody noticing this.

~~~
mbesto
I do due diligence on VC/PE projects for a living. Either their diligence
partner is really poor or they simply ignored their advice. Despite having
$300MM on the line, you'd be surprised how often either situation happens.

------
pbreit
The writing seems sloppy. For example, calling TCV a "small shop" is flat out
wrong. Not only is it not small, by some measures, it is the biggest!! Having
raised over $10b including an 8th fund at $2.2b! And Matrix is no slouch
either having raised $2.4b including a $1b fund and seed investing in AAPL.

------
on_
This media angency began as an "internet popularity contest in 2006". It rose
to prominence by blog spamming and riding the coattails of the popular meme
"clickbaiting". It gained notoriety for the amount fo javascript used to serve
advertisiments, poor articles, limited content and tracking and selling user
data. At one time it was the biggest clickbait and blogspam mill on the entire
internet.

It has earned another distinction, as a unicorn. Having a value of north of
$850 million, valued in an investment by silicon darling Andreesen Horowitz.
Andreesen Horowitz partner Chris Dixon went on to proclaim that the company
was a great investment and would be a legitimate media entity.

Buzzfeed, have you forgotten you are Buzzfeed. You can't write a quote like
this, and be taken seriously:

In practice, that meant a factory of winking pop-ups, banner ads,
advertorials, and landing pages everywhere from Yahoo Mail to AOL and MSN,
displaying pictures of old women transforming into young ones and scales
tipping to lighter numbers. The rapid A/B testing and modification of these
ads has always been Goldenberg’s strength

The irony is glaring and the funniest part is they don't realize it.

------
pbreit
BTW, did any of the Pando accusations against Beachmint pan out?

------
iamadam
To play devils advocate here, doesn't the individual always have a
responsibility to read the fine print rather than blindly plugging their
credit card details into an offer for cheap shoes?

~~~
sageabilly
You could, but it'd take an entire month out of your year [1]

[1][https://www.techdirt.com/articles/20120420/10560418585/to-
re...](https://www.techdirt.com/articles/20120420/10560418585/to-read-all-
privacy-policies-you-encounter-youd-need-to-take-month-off-work-each-
year.shtml)

~~~
prawn
Obviously it'd be subjective, but important terms could be disclosed with the
same prominence as features are marketed.

