Reference pricing

This article originally appeared in Footwear Today.

Ever been tempted by a label stating “was £100, now £25” to buy the product immediately to avoid missing out on the bargain? The tactic, known as reference pricing, is used in the industry to encourage sales.

The concept of reference pricing concerns offers by retailers to highlight to consumers that current prices of products are good value by including a reference to a higher past or future price. The use of reference pricing is thought to influence consumers to buy goods when otherwise they would not, as the consumer is led to believe that the goods are of a higher value and that they are getting a bargain buying at the current lower price.

In itself, there is nothing wrong in this. However, the OFT has recently commenced an investigation into whether several high street retailers have been engaging in the use of misleading reference pricing. So what are the rules?

UK consumer protection legislation introduces a general duty not to trade unfairly and seeks to ensure that retailers act honestly and fairly towards customers. A commercial practice is deemed to be a misleading action if:

  1. it contains false information, or if its overall presentation in any way deceives or is likely to deceive the average consumer, even if the information is factually correct; and 
  2. it causes or is likely to cause the average consumer to take a transactional decision he would not have taken otherwise. 

The Pricing Practices Guide, produced by the Department for Business Innovation & Skills, provides guidance to traders on good practice when using reference pricing. 

The Guide recommends that a retailer should generally use, as the basis for comparison, the most recent previous price for the product, which should have been available for at least 28 consecutive days and last offered to consumers no more than six months earlier. The period of time for which the lower price would be available should not be so long that the comparison price becomes misleading.  

Initial reports in respect of the current OFT investigation have shown that, on average, 95% of sales made by the retailers had been made at the lower stated price, indicating that the higher advertised prices were not genuine. However, at the present time the OFT has emphasized that it should not be assumed at this stage that any breach of consumer protection legislation has occurred. 

Although it is possible to understand that a retailer may be tempted to advertise false reference prices for reasons of competition, reference pricing in this way can be harmful to consumers as the seemingly low prices put pressure on the consumer to buy the product immediately, rather than looking around the market for the best available deals. 

The current investigation comes in the wake of Tesco being fined £300,000 in August for running a misleading summer promotion on strawberries. Tesco sold their punnets at a price of £3.99 for one week, £2.99 for a further week, and “half-price” at £1.99 for 14 weeks. It was argued that Tesco’s strawberry offer was presented in a way that misled or was likely to deceive consumers. 

The judge hearing the case commented that consumers “had a high degree of trust” in national supermarket chains and that the promotion in question was “patently wrong and misleading”. 

The Tesco case and the current investigation indicate that the OFT is clamping down on the use of misleading price referencing. Indeed, one of the OFT’s priority themes in its Annual Plan 2013/2014 is to address pricing practices that act as a barrier to fair choice and effective competition. 

If the OFT should find that the reference prices used have been misleading, it has the power to take civil and criminal enforcement action against the retailer. 

The OFT may prosecute retailers in relation to criminal offences, with a penalty of a fine not exceeding £5,000 on summary conviction. In addition an unlimited fine or (for the most extreme cases) imprisonment for up to two years can be imposed on an officer or manager of the retailer who consents to (or acts negligently in relation to) the infringement of consumer protection legislation (or both) on conviction on indictment. 

If the retailer continues to use misleading reference prices following consultation with the OFT, civil action may also be brought. The OFT may apply to a court for an Enforcement Order stating that the retailer must stop, and not repeat, the infringing conduct. A breach of such an order could be found to be a contempt of court. 

Often, however, the non-legal consequences of infringement, such as the adverse publicity suffered by the retailer and the waste of management time, will be of equal concern.