Strike-through pricing is a popular marketing technique where a higher “regular” price is listed on marketing materials and crossed out immediately adjacent to a lower, “discounted” sale price. The practice is policed when “unfair or deceptive” by federal and state regulatory agencies, as well as private plaintiffs.
Marketers should consult with a strike through pricing lawyer to minimize exposure to legal regulatory action and class action claims.
FTC Deceptive Pricing Guides
Section 233.1 of the Federal Trade Commission’s Guides Against Deceptive Pricing addresses comparison pricing.
First, it addresses former price comparisons. If the former price is the actual, bona fide price at which the article was offered to the public on a regular basis for a reasonably substantial period of time, it provides a legitimate basis for the advertising of a price comparison. Where the former price is genuine, the bargain being advertised is a true one. If, on the other hand, the former price being advertised is not bona fide but fictitious—for example, where an artificial, inflated price was established for the purpose of enabling the subsequent offer of a large reduction—the “bargain” being advertised is a false one; the purchaser is not receiving the unusual value he expects. In such a case, the “reduced” price is, in reality, probably just the seller’s regular price.
A former price is not necessarily fictitious merely because no sales at the advertised price were made. Advertisers should consult with a strike through pricing lawyer and take care, however, in such a case, that the price is one at which the product was openly and actively offered for sale, for a reasonably substantial period of time, in the recent, regular course of his business, honestly and in good faith—and not for the purpose of establishing a fictitious higher price on which a deceptive comparison might be based. Also, advertisers should work with advertising price compliance counsel in order to avoid any implication that a former price is a selling, not an asking price (for example, by use of such language as, “Formerly sold at $______”), unless substantial sales at that price were actually made.
An advertiser should also be careful about using a price at which it never offered the article at all; featuring a price which was not used in the regular course of business, or which was not used in the recent past but at some remote period in the past, without making disclosure of that fact; using a price that was not openly offered to the public, or that was not maintained for a reasonable length of time, but was immediately reduced.
If the former price is set forth in the advertisement, whether accompanied or not by descriptive terminology such as “Regularly,” “Usually,” “Formerly,” etc., an advertiser should make certain that the former price is not a fictitious one. If the former price, or the amount or percentage of reduction, is not stated in the advertisement, as when the ad merely states, “Sale,” the advertiser must take care that the amount of reduction is not so insignificant as to be meaningless. It should be sufficiently large that the consumer, if he knew what it was, would believe that a genuine bargain or saving was being offered. An advertiser that claims that an item has been “Reduced to $9.99,” when the former price was $10, is misleading the consumer, who will understand the claim to mean that a much greater, and not merely nominal, reduction was being offered.
Next, the FTC Deceptive Pricing Guides address retail price comparisons and comparable value comparisons. A commonly used form of bargain advertising is to offer goods at prices lower than those being charged by others for the same merchandise in the area in which the advertiser does business. This may be done either on a temporary or a permanent basis, but in either case the advertised higher price must be based upon fact, and not be fictitious or misleading.
Whenever an advertiser represents that it is selling below the prices being charged in the area in which the advertiser does business, it should be reasonably certain that the higher price it advertises does not appreciably exceed the price at which substantial sales of the article are being made in the area—that is, a sufficient number of sales so that a consumer would consider a reduction from the price to represent a genuine bargain or saving. In other words, if a number of the principal retail outlets in the area are regularly selling Brand X fountain pens at $10, it is not dishonest for retailer Doe to advertise: “Brand X Pens, Price Elsewhere $10, Our Price $7.50”.
A closely related form of bargain advertising is to offer a reduction from the prices being charged either by the advertiser or by others in the advertiser’s trade area for other merchandise of like grade and quality—in other words, comparable or competing merchandise—to that being advertised. Such advertising can serve a useful and legitimate purpose when it is made clear to the consumer that a comparison is being made with other merchandise and the other merchandise is, in fact, of essentially similar quality and obtainable in the area. The advertiser should, however, consult with advertising counsel to be reasonably certain, just as in the case of comparisons involving the same merchandise, that the price advertised as being the price of comparable merchandise does not exceed the price at which such merchandise is being offered by representative retail outlets in the area. For example, retailer Doe advertises Brand X pen as having “Comparable Value $15.00”. Unless a reasonable number of the principal outlets in the area are offering Brand Y, an essentially similar pen, for that price, this advertisement would be deceptive.
The FTC Deceptive Pricing Guides also address advertising retail prices which have been established or suggested by manufacturers (or other nonretail distributors). Many members of the purchasing public believe that a manufacturer’s list price, or suggested retail price, is the price at which an article is generally sold. Therefore, if a reduction from this price is advertised, many people will believe that they are being offered a genuine bargain. To the extent that list or suggested retail prices do not in fact correspond to prices at which a substantial number of sales of the article in question are made, the advertisement of a reduction may mislead the consumer.
There are numerous methods by which manufacturers’ suggested retail or list prices are advertised. Large scale mass-media advertising by the manufacturer himself; pre-ticketing by the manufacturer; direct mail advertising; and distribution of promotional material or price lists designed for display to the public.
According to the FTC Pricing Guides, there would be little problem of deception here if all products were sold at the retail price set by the manufacturer. However, the failure to observe manufacturers’ suggested or list prices and retail discounting on a wide scale, have significantly undermined the dependability of list prices as indicators of the exact prices at which articles are in fact generally sold at retail. Changing competitive conditions have created a problem of deception. Today, only in few cases case are all sales of an article at the manufacturer’s suggested retail or list price.
However, this does not mean that all list prices are fictitious and all offers of reductions from list are deceptive. Typically, a list price is a price at which articles are sold, if not everywhere, then at least in the principal retail outlets which do not conduct their business on a discount basis. It will not be deemed fictitious if it is the price at which substantial (that is, not isolated or insignificant) sales are made in the advertiser’s trade area. Conversely, if the list price is significantly in excess of the highest price at which substantial sales in the trade area are made, there is a danger of the consumer being misled by an advertised reduction from this price.
This general principle applies whether the advertiser is a national or regional manufacturer (or other non-retail distributor), a mail-order or catalog distributor who deals directly with the consuming public, or a local retailer. But certain differences in the responsibility of these various types of businessmen should be noted. A retailer competing in a local area has at least a general knowledge of the prices being charged in his area. Therefore, before advertising a manufacturer’s list price as a basis for comparison with his own lower price, the retailer should ascertain whether the list price is in fact the price regularly charged by principal outlets in his area.
A retailer that advertises a manufacturer’s or distributor’s suggested retail price should consult with advertising compliance counsel and be careful to avoid creating a false impression that it is offering a reduction from the price at which the product is generally sold in its trade area. If a number of the principal retail outlets in the area are regularly engaged in making sales at the manufacturer’s suggested price, that price may be used in advertising by one who is selling at a lower price. If, however, the list price is being followed only by, for example, small suburban stores, house-to-house canvassers, and credit houses, accounting for only an insubstantial volume of sales in the area, advertising of the list price would be considered deceptive.
On the other hand, a manufacturer or other distributor that does business on a large regional or national scale cannot be required to investigate in detail the prevailing prices of its articles throughout a large trade area. If it advertises or disseminates a list or pre-ticketed price in good faith (i.e., as an honest estimate of the actual retail price) which does not appreciably exceed the highest price at which substantial sales are made in its trade area, it will not be chargeable with having engaged in a deceptive practice.
It is worth repeating that a manufacturer, distributor or retailer must always act honestly and in good faith in advertising a list price, and not with the intention of establishing a basis for a deceptive comparison. For example, a manufacturer may not affix price tickets containing inflated prices as an accommodation to particular retailers that merely intend to use such prices as the basis for advertising fictitious price reductions.
The FTC Deceptive Pricing Guides also address bargain offers based upon the purchase of other merchandise. Sometimes, advertisers choose to offer bargains in the form of additional merchandise to be given a customer on the condition that it purchase an article at the price typically offered by the advertiser. There are numerous forms that these types of offers may take, however they all have essentially the same purpose and effect. Representative of the language frequently employed in such offers are “Free,” “Buy One—Get One Free,” “2-For-1 Sale,” “Half Price Sale,” “1¢ Sale,” “50% Off,” etc. However, the seller is not offering anything “free” or 1⁄2 free, or for only 1¢, when it makes such an offer because the purchaser is required to purchase an article in order to receive the “free” or “1¢” item. It is important that care be taken not to mislead a consumer.
Here, where the seller increases its regular price of an article required to be bought, or decreases the quantity and quality of that article, or otherwise attaches conditions in order for the consumer to be entitled to the “free” or “1¢” additional merchandise to the offer, the consumer may be deceived. Accordingly, whenever a “free,” “2-for-1,” “half price sale,” “1¢ sale,” “50% off” or similar type of offer is made, all the terms and conditions of the offer should be made clear at the outset.
There are many variations of advertising conduct that may also violate the FTC Deceptive Pricing Guides. For example, retailers should not advertise a retail price as a “wholesale” price. They should not represent that they are selling at “factory” prices when they are not selling at the prices paid by those purchasing directly from the manufacturer. They should not offer imperfect or irregular merchandise at a reduced price without disclosing that the higher comparative price refers to the price of the merchandise if perfect. They should not offer an advance sale under circumstances where they do not in good faith expect to increase the price at a later date, or make a “limited” offer which creates a false sense of urgency when, in fact, is not limited. In all of these situations, as well as in others too numerous to mention, advertisers should make certain that the bargain offer is genuine and truthful.
California’s Strike-Through Pricing Law
California Business and Professions Code section 17501 is the main statute that governs strike-through and “former” pricing. Pursuant to the statute, an advertised former price must genuinely reflect the prevailing market price within a recent timeframe.
The “prevailing market price” is the common or predominant price at which a product is sold in the market (not just by the retailer) within the three months prior to dissemination of an advertisement. The prevailing market price has a nexus to the advertisement’s locality and time. Retailers must consult with advertising compliance counsel in order to understand the distinct nuances of the California statute and to make certain that discount claims reflect actual market data.
In California, the former price must accurately reflect the market price at which the product was offered for sale in the recent past. But that it not all. The former price must have been the prevailing market price within ninety days preceding the dissemination of the advertisement. Otherwise, a retailer is required to clearly and conspicuously disclose the last date the article was sold at that price. Additionally, a seller cannot inflate former prices to create a false impression of a bona fide discount.
The California statute is intended to ensure that consumers are offered bona fide “discount” prices. In addition to ensuring that advertised prices are truthful and not misleading, advertisers should consider maintaining accurate records of prices at which articles are sold, for how long the prices were offered, and respective dates. Advertisers may also wish to consider working closely with a qualified strikethrough and discount pricing lawyer to appropriately disclose the basis of the strike-through price, and designing and implementing written policies and training materials so that employees understand legal regulatory requirements.
