Why was a scam company able to raise $76 Million Series B?
It kept me wonder why a company with very questionable (I will try to avoid using the word "fraudulent") business model was able to raise big money. Didn't the VCs have to do the due diligence?
I didn't have any direct experience with JustFab. The victim was my girlfriend. Back in January or so, one of her friends emailed her a link to JustFab, then she bought a pair of shoes from www.justfab.com and never visit the website again. Only 8 months later, in early September she was appalled to find out that her credit card has been charged a $39.95 fee for the last eight months. Yes, $39.95 for 8 months, without geting anything from JustFab.
I then did a bit research on the internet. It turned out my girlfriend wasn't the only victim. Apparently JustFab works like this: once you buy something from their website, you become their "VIP member". Then you will have to log into their website between the 1st-5th of each month and click “Skip This Month”. If no action is taken (either skip this month, or cancel your account), they just charge you a $39.95 fee every month.
According to the Business insider article, JustFab "will generate about $100 million this year" in sales, I wonder how much of this $100 million are from people like my girlfriend who simply didn't read their entire 2,500 words Terms of Service and were unaware that they were charged $39.95 a month for nothing.
p.s. After JustFab CSR refused to refund, I decide to post this story again, hoping it will get upvoted to the frontpage of HN so that more people get to know what is really going on behind JustFab
pps. Anyone could just simply google "justfab scam" to see how many others have been victimized. It's outrageous such large scale scam got unnoticed.
184 comments
[ 2.5 ms ] story [ 268 ms ] threadObviously, the next step for you, at the very least, is disputing the charges with the card company, seeing that the company is unwilling to refund the fees.
If you have to read mice type to find out the full T&C, there's something less than reputable about how you do business.
EDIT: Just looked at the FAQ on the site, they are up front with their 2 options. The shoes are $39.95 if you sign up for the VIP program, otherwise they're full price. So if you want the sale price, you've got to sign up for VIP. http://www.justfab.com/faq.htm#Q02
http://uncrunched.com/2012/08/26/my-undead-credit-card/
Like it or not they have a good business model.
And the VCs probably don't care if they're ethical, as long as they get a good ROI.
http://www.crunchbase.com/company/justfabulous
Website pcjyyvafopee.com Blog pcjyyvafopee.com Twitter @mpizldqpida Phone 91857712122 Email juxukt@yhjfkm.com Employees Founded 8/95 Description tPdwOyyKkVKVskrYrIv
http://www.crunchbase.com/financial-organization/technology-...
The <Series B> Round was led by new investor Rho Ventures, with participation from existing backers Matrix Partners, Technology Crossover Ventures (TCV) and Intelligent Beauty, JustFab’s parent company, which incubated and launched the startup in 2010. The total amount of money now raised by JustFab is $139 million.[2]
______________
From:
[1] http://www.techmeme.com/110921/p29#a110921p29
[2] http://techcrunch.com/2012/07/26/justfab-just-nabbed-another...
IMHO the most important consideration is that the more aggressive any company is about acquiring new customers under this kind of model, the more liberal it should be about returns/refunds/cancellations. There were many lessons learned a couple years ago when discount-membership checkout programs (WebLoyalty, Affinion, Vertrue) and their e-commerce partners (Fandango) got the smackdown from various state AGs. There's enough similarity here to warrant paying close attention and making sure to stay on the right side of a thin line. Here's example coverage of the previous controversy:
http://www.zippycart.com/ecommerce-news/1165-affinion-vertru...
I've uploaded the credit card section here:
http://i.imgur.com/3di93.png
It says you'll be billed month per month on the right hand side under the VIP membership program, but I think it's pretty clear that the page is engineered to be misleading. It looks like a standard upsell, not a mandatory part of the purchase.
They're relying on people clicking the accept terms and conditions check box without realizing that it's signing them up for the membership, i.e. it's the terms and conditions of the program, not the site in general.
Terms and conditions boxes are common in the checkout process and nobody gives them a second thought. I'm not sure I would have caught this one if I went in naively.
Clearly unethical, IMO.
"You must read and agree to the JustFab VIP Membership Terms of Service."
Which makes sense - I bet they're making a killing on zombie subscription fees and little on legitimate users.
http://wiki.darkpatterns.org/Main_Page
What exactly could people instead be lured into thinking they're doing here?
I'd expect that to be a re-occurring cost.
I suppose it may be out of the norm of some people, especially the HN crowd, but this kind of thing isn't really unusual.
Brick and mortar stores have VIP programs all the time.
Yes. But you can also show up and buy a pair of shoes. I don't believe what you are describing is a fair analogy.
When I order a pair of shoes I expect a pair of shoes. I don't expect a hat, jacket, or a personalized VIP shopper.
On this website if I pretend to order a pair of shoes there isn't anything to indicate (aside from the fine print) that I'll be receiving more than a pair of shoes.
I'd expect this place to suffer a pretty serious class-action lawsuit soon. If I was an investor I'd run as far away as possible.
Honestly, I'd have to click around a little bit to even figure out how to just search something without first joining them and going through the VIP program upsales processs.
Well, you could, but those terms would be ineffective. Of course, this doesn't help if they succeed to intimidate the victim. But if the victim doesn't pay, there's nothing the scammer can do, because this case would never succeed in court.
Having said that, it might help if the victim complains to the police. Depending on how serious customer protection is taken in the US, this business might be more than merely "unethical".
Enough charge backs and they lose their merchant account.
Most Credit cards users don't realize just how simple it is to run a charge back. It is literally one short phone call.
To me it's pretty clear that it's a recurring service, like many others that exist for chocolate, wine, beer, socks, razors, etc. The right hand side on the checkout is clear enough, and the skip the month part is there highlighted, not in small letters.
EDIT: apparently this is just the flow after choosing something on the home page. If you choose one of the "special" products or go to the Featured section, it does go through a standard add to cart + checkout flow (http://minus.com/lA7snPkHUHOZR). That is actually terribly misleading.
After all , it would seem strange to be voluntarily charged unnecessarily.
I was prepared to disagree with OP but the model does seem a little customer-hostile.
Seems to me that they're saying if you're a member but didn't make your decision for your free (sunk cost) product by the 6th, they charge you and turn it into store credit. It's not like they're charging you and saying "too bad, you don't get anything."
I will say that the negative attention this confusion could bring them is more harmful to them than if they revamped the purchase process to just make it crystal clear what you're buying.
From my experience at Poll Everywhere, the "sidebar" on the checkout process does not get read by anyone, anytime. For some reason, the sidebar becomes a blindspot and is ignored (at least in our testing) during a checkout process and so is thus not a great spot to put reminders about how you're joining a membership and will be charged monthly if that is the only place is is put.
Actually it says you'll be billed for a "Member Credit", which "can be redeemed for any JustFab style on the site".
I'm not sure what that means exactly, but if you can actually redeem one of those credits for $39.95 worth of product, then 1. it's still very misleading because you spent a lot more money in their store, on their products than you intended to, but 2. at least your money didn't just evaporate, except 3. is there anything preventing them from at some point deciding "From now on, we will only sell novelty dish-washing sponges, at the great rate of one credit per sponge!", making all out-standing credits worthless in a single TOS change?
I don't think this is some grey area: if you tricked me into paying a sum I never chose to pay, you're stealing money off my pocket.
Those ads usually seem to target teenagers (they're mostly on music channels or channels aimed at kids) who probably aren't in charge of the bill and if they're not careful they might end up with a bad surprise. This is beyond shoddy.
The law like anything else is a system, justfab is exploiting it for fun and profit.
I really hope you are aware of the difference.
(Also you don't get “nothing” for $39.95; you get store credit. That sucks if you didn't want any, of course, but given the fact that people actively sign up to be able to purchase from that store, I can't imagine it's entirely worthless.)
For example, maybe they keep enough to funds for last 6 months of chargebacks and have some special kick-back to bank? Or maybe the game plan is to always open a new merchant account after the first one is closed? Or maybe the bar is so low and they never need to worry to lose their merchant account?
Porn sites, bail bonds, check cashing locations, dating sites, weight loss centers, and dozens of other types of businesses use this category of services which has a very high tolerance of chargebacks.
The sad part is if you get enough chargebacks you can actually bake in a higher transaction cost and not have to pay per-chargeback fees like other normal merchants do.
I'm sorry: you're talking about the section that explains "How the JustFab VIP Program Works"? Whose 4 bullet points say:
1. Get a boutique the first of the month 2. Browse and Buy 3. Don't like anything, skip 4. If you don't buy or skip by the 5th you'll be charged anyway?
And a default unchecked box that you read and agree?
I think the concept of "engineered to be misleading" might just put the points in say, a small font, or in the terms and conditions behind a link. If someone describes it clearly in bold font in a section explaining how the site works, well, that's a pretty strange way of misleading people.
Think of the people in your life not quite as tech-savvy as yourself, like maybe your next-door neighbour or your mother. Would you expect them not to be misled by this? Sure, I'd hope my mother would be critical enough to notice, but I can easily see it happen otherwise.
Another indication is, I assume that a lot of people who do notice will instead decide to bail out entirely and not buy anything, rather than (like I would do, if I really wanted the item) pay, log in, and cancel the account immediately. Because that's not really an obvious thing to do, given the set expectation of being a regular online shopping store.
I wonder how they managed to have the site up for so long - may be some kind of a high risk merchant account provider who approved their payment gateway.
I remember evaluating the books for one of those companies back in the day. It was wildly successful at the surface level. But if you dipped below the surface, you noticed that its biggest strategic weakness was "Breakage," i.e., the rate at which people eventually discovered they'd been duped and then cancelled their subscriptions. It turned out that the average subscription lasted 2 to 3 months, and nobody kept a subscription longer than 5 months. This basically meant that the company's entire business model was predicated on scamming new users at a rate quicker than its existing users could break away. While not a Ponzi scheme in the true sense, the model operates on a similar assumption. But the assumption is not sustainable in the long run.
I look at a lot of companies these days -- especially all the companies in the pop-up sale business, the subscription-box business, etc., and wonder how many are following this playbook. And I wonder why VCs keep backing them. Obviously it's a fantastic way to earn tremendous growth up front. And, while the getting lasts, the getting is pretty darned good. But it's sad to think that legitimate startups may get turned down, or underfunded, for the quick buck and easy exit that can be made on this crap.
Not every business is 'sustainable' through repeat customers - funeral homes come to mind. However, if the only way to be sustainable is to break laws, that's where the problem lies.
Sad thing is, JustFAB seems to be just like these companies. Only it looks good and it is supposed to be a 'legitimate' business.
Sure, but at the scale the ringtone business grew (and burned through users), they eventually ran out of suckers to scam. A lot of them would fold shortly thereafter, or move on to a different market (usually a completely different country), or consolidate with another company overseas and tap the suckerbase there.
This model is basically a modern, bigger-scale version of the old snake oil sales model. Set up a shop in town, sell a bunch of bad merch, get run out of town, find a new town. Rinse and repeat.
Eventually, though, your model catches up to you. Either you're closing up shop in old markets and opening new ones that aren't as big or lucrative, or you're keeping a toehold in the old markets -- but the costs of doing so grow faster than your revenues. Or you flee Market A for Market B, only to have a competitor or two leap into Market B the next month.
I never thought that was a shady business model, per se, and whilst it wasn't entirely intuitive how they worked to a 14 year old, I blamed myself for screwing up by joining- not the company.
This site seems to be entirely designed to mislead you into thinking you're just ordering one item, while in fact you are signing up for a membership.
Signing up for the first one (book club) may be a bad business decision on the customers part, but this second style simply seems fraudulent to me.
Bingo!
My phone's a prepaid, so this ran the balance down to the minimum $1.50 in short order, but I didn't know whether perhaps somebody in the family had simply used those minutes - so I recharged it with $50. In three days, it was back at $1.50 and it had done nothing but vibrate in my desk drawer occasionally.
The "premium SMSs" were sent as system SMSs so they wouldn't appear in my Inbox; if I hadn't noticed one or two I wouldn't have seen them at all. I thought they were simply SMS spam, not even knowing that a "service" like premium SMSs even existed. They seemed to include a URL and nothing else - on a phone that only supports Internet on GPRS, which is no longer even available in Budapest.
T-Mobile said that for privacy reasons, they can't divulge the identity of those companies. Of course, T-Mobile gets about half of the cost of each premium SMS, so it's not terribly surprising that they're not highly motivated to stamp out scams. I told them to remove my ability to enjoy the premium SMS service, and they obliged, but that's as far as they would go.
(Nothing against Hungary. Same thing happened to me once in America with 900 numbers; the only thing the phone company would say is that somebody must have plugged a phone into our outside service jack - we turned off 900 numbers then and made sure they were off for every subsequent landline we obtained, but a scam's a scam.)
I have no recourse under Hungarian law, incidentally. Since a subscription was entered from my phone, there's nothing I can do to recover that money. It's no great problem for me, but that's a lot of money to the average Hungarian, who is absolutely powerless against a big foreign company like T-Mobile.
I currently have T-Mobile in the US and haven't had the problem you describe, but based on your story I'll probably be a bit more willing to shop around next time I need to change my contract.
Sometimes they are enabled without your permission. My mom's phone number auto-magically gets subscribed for 'premium SMSs'. She doesn't understand how to send SMS's and cant use the phone interface apart from dialing a few numbers. Yet she often complains of money getting deducted from her pre paid account.
Called the customer care numerous times and every time all we get is - 'We are sorry sir, may there was an error in our system'.
Needless to say these mobile company thieves make millions from these 'errors in the system'.
That is why the smarter scammers refund to everybody who complains, not refunding is plain dumb. This scam has been around for a long time, usually it's adult companies that sell you a 'free' membership with an age verification which comes with a pack of subscriptions tacked on for other stuff that you will never use.
This practice of selling unsuspecting consumers a subscription with auto-renew when they think they're doing a one time transaction needs to be stamped out.
If the company continues to receive chargebacks claiming fraudulent charges (which this really does appear to be) they will find themselves in a difficult place with card processors.
Some processors drop clients if they crack 0.5% a chargeback rate.
The credit card processing chain is quite complicated, with banks, card companies, ISPSs, processors and merchants all having fairly clearly delineated roles. A merchant - no matter how big - implementing the whole chain is unheard of.
Visa, MC and other cc companies care a lot more about their reputation than they'll even care about a company like this.
Much larger fish have been put on the bbq over less substantiated claims of fraud.
As far as I know they use GE as the issuing bank, they may have other deals in place.
As far as I know - but this may very well be wrong or at least out of date - amazon does not have a banking license and the network used is VISA.
This seems to confirm that:
http://www.cardhub.com/d/amazon-credit-card-1015c/
I would guess Amazon have looked at replacing as much of the payment chain as they can and done the parts that are profitable to replace. But they have a long way to go before the enormous hassle of becoming a bank is going to be attractive and possible.
Ultimately VISA determines who gets to participate in the VISA credit exchange network and will fine acquiring banks who participate in things like this. No one can force their way in and avoid responsibility -- period.
http://www.gemoney.com.au/en/credit_cards/index.html
Piss off VISA/MC/JCB/AMEX and you're in trouble.
You mean processor/bank/merchant account, not merchant. In the parlance of the payment industry justfab is the merchant in this story.
And yes, there are scammers that have processors / banks lined up but they burn through them at a rate of about 1 every 8 weeks or so, and each time that happens they forfeit a large amount of cash. There are not that many merchants willing to play the game that way.
50 chargebacks or 0.5%, whatever gets hit first and you're in trouble. Reputation damage to the CC companies and you're out for good. Merchant account hopping is not a long term viable strategy.
Try it, absolutely still try it, and good luck!
As a customer of the card company you have the right to dispute charges as far back as you want, whether they'll honor that or not is a different question but typically up to 6 months in a card-not-present situation should give you no problem at all. And once the complaints about this company start rolling in it will get even easier.
Mass chargebacks are a very powerful weapon in the hands of organized consumers.
Not when it's lumped into a single balance that you pay significant monthly interest on.
In many cases the cc company debiting your checking account is automated and there is no step for you to verify other than to periodically go through your statements to see if you have taken on any ghost charges.
There's a bit of mis-information here.
First, while credit card companies and banks can chose to honor disputes of any age, your rights under the FCBA protect you for only 60 days -- and the FCBA doesn't apply to debit cards at all.
My tip -- that you should never use a debit card and with credit cards you should dispute charges before paying the bill -- is correct in spirit but not in the letter of the way I worded it, so mea culpa on technicalities but the point is correct. The FCBA only grants you 60 days to dispute a transaction (after the statement cut, not the transaction itself).
Also, CC disputes have some consequences. Companies aggregate & share lists of customers that have charge-backed. Finding yourself on the list can see you turned-away from legitimate, good businesses that have to protect themselves against dispute-prone customers.
They can take you to court for breach of contract, and if (IANAL) the subscription contract is found to be legit, you have to pay + fees.
For that there would have to be a much more transparent sign up process and actual delivery. Non-performance is not a good basis to start a law suit, especially if you're on the non-performing side.
Most large merchants have risk mitigation strategies that attempt to detect this before a charge gets processed and goods are shipped but that's a less-than-perfect mechanism.
Second: Are you a lawyer? Is that the guaranteed outcome of such cases? Will it really carry no weight that they can (probably) substantiate their claim that you checked the box with a technically sound argument that their website actually works? A manual release test plan, unit tests, cucumber scripts?
That one, single checkbox, and the fact that you have to manually check it, is the legality upon which the entire business hinges. Especially if they're a little shady, they'd be sure to have their stuff in order around this.
I'm not a lawyer, but I am a programmer. I would never swear that my software works so correctly that I will use the actions of the application as proof that a user did check a box. If he claims he didn't, well, he just may be right. I've seen enough weird things happen not to trust any software to behave correctly all the time.
Now my technical reasons may not be relevant for a judge, but I doubt judges are very trustworthy of technology (they should have heard plenty of cases where technology failed and they will be users of all kinds of awful consumer technology, that sometimes, suddenly fails for no clear reason) and won't think favorably about a company with these kinds of practices. Perhaps I'm naive, but those things combined will lead a judge to believe you over the company.
It can be entirely legal, while at the same time anyone that claims otherwise should immediately be refunded and let go. In fact, it would be smart to do that, as it prevents bad publicity. Any user that is dissatisfied should be compensated and should be free to leave, always. That saves money.I have also won 3 chargebacks against companies who never delivered their product or used deceptive practices. The process was not too difficult, and I believe the CC companies tend to side with the consumer. Verdicts on the disputes can take several months to process though.
On the other hand, both Visa and Mastercard are pretty much useless to 'protect' you against charges like these.
(disclaimer: I'm not from the US)
I'm kind of surprised no one has started a service for merchants to warn them of chargeback prone customers (there are people who go straight for the chargeback without even trying for a refund first).
There are plenty of such services. You don't see them because they don't normally operate on the merchant level, they operate on the IPSP / processor / card company level.
The reason why they don't usually operate on the merchant level is because that would allow a merchant to pollute the pool with their 'known good' cards to stop people from buying a product with competitors. You have to wonder when you buy this information as a merchant whether it is clean or not. But when an IPSP / processor or card company uses their aggregate knowledge then it starts to be really useful.
You can do AVR checks and so on all by yourself as a merchant but most if not all reputable IPSPs will have an anti-fraud system in place that does all kinds of checks.
You can learn more at http://precharge.com/guaranteed_chargeback_protection/
Essentially you pay Precharge to qualify the customer and if it passes their fraud checks, they will reimburse or fight the chargeback.
They might be maintaining their own repository of problem customers here: http://www.chargebackfile.com/
Hope this is helpful to anyone considering mitigating chargeback risk.
Did it take your girlfriend 8 months to notice this recurring charge on her statement?
I have a story about forgetting to cancel my online newspaper subscription. Look for that on HN soon!
JustFab isn't going to help disambiguate their business model up front because that would hurt their bottom line.
In this case, everyone knows the jig may be up quickly, so they're looking to expand quickly and leave before the known end.
and some more people with similar stories:
http://www.consumeraffairs.com/online/justfab.html
http://www.scambook.com/company/view/146/JustFabcom
http://forum.purseblog.com/the-glass-slipper/justfab-com-sca...
- Any company of any size in America has been sued in a consumer class action -- many reputable companies scores or even hundreds of times. Some lawyers make their living that way. Most of these suits involve highly subjective elements such as whether there was enough disclosure in the right place of the right type to avoid consumers being misled. (Inevitably, in any mass-market consumer business, some consumers will be misled -- not necessarily the sharpest tools in the drawer.)
- Don't ever believe the version of the facts portrayed in a plaintiffs' complaint (in any suit). Ours is an adversarial system, meaning that, as in politics, you can count on each side to overstate its version of reality about 10X or 100X so that it looks like they're inhabiting alternate universes.
JMHO.
That shit is poisonous to the startup sector, some people already think it's some kind of voodoo and this kind of thing doesn't help.
but I didn't find a single mention of membership fees on this page.
I'd heard a lot about this company, but had no idea what they were until now. Disgusting.
Is it misleading? Yeah slightly, except it says exactly what will happen with a bright pink numbered list. Did they create the program hoping some people will forget about it? Yes definitely. But, this a common tactic employed by any company with a monthly subscription.
All this outrage is a little ridiculous.
Was your girlfriend able to redeem her credits?
This just makes the coregistration first party.
Chargebacks don't lie, not at this scale. If customers were being scammed, they wouldn't be able to process cards.