Consumers are becoming increasingly savvy with shopping across different retailers and channels – smoothly navigating between the digital and physical – and retailers are continuing to make investments in omnichannel capabilities and now unified commerce to address the insatiable consumer appetite for transparency in inventory assortment and availability, product reviews, as well as pricing and promotions. It is of paramount importance that not only proper technology supports this voracious shopper desire, but also that retailers’ underlying policies and business practices are designed to conform to legal guidelines, all while aligning with retailer value propositions and business models.
Indeed, successful coordination of this amalgamation of requirements is no small task. Tackling new technology and defining company policies involve deep understanding of the company’s desired business processes, which also must consider the legal and regulatory implications. Without succinct understanding and adherence to the admittedly somewhat vague laws pertaining to the retail industry, retailers can unknowingly set themselves up for costly lawsuits.
“Retail promotions are conceived of and executed by merchants and marketers who are largely unfamiliar with the laws and guidelines that apply to advertisements and discounts. They often follow pricing strategies and practices that were established long ago and may have evolved due to competitive pressures, causing these strategies to drift into legal gray area. In addition, the amount of promotion in retail has escalated dramatically. According to a 2013 article in The Wall Street Journal, “The number of deals offered by 31 major department store and apparel retailers increased 63% between 2009 to 2012, and the average discount jumped to 36% from 25%…” Imagine how these offers have increased since, given punishing market conditions. This increased frequency of discounts and desire to communicate savings to customers has made it harder to comply with the tangle of laws that govern fair advertising practices. Nevertheless, it is important for retail decision makers to have a basic understanding of the guardrails they should apply to pricing as it relates to promotions.
Fair Advertising Statues
There are two major sources of fair advertising statutes, the federal government and individual states. Unfortunately, this produces a patchwork of disparate perspectives that can be difficult, if not impossible, to reconcile. Federal guidelines are outlined in the Code of Federal Regulations (accessible through the web site: www.ecfr.gov) and enforceable by the Federal Trade Commission (FTC). The FTC is an independent agency of the United States government whose main charter is the promotion of consumer protection as well as the elimination and prevention of anticompetitive business practices. The relevant section of the Code of Federal Regulations is titled, “Guides Against Deceptive Pricing” (hereinafter referred to as “The Guides”). However, the FTC is not currently acting to enforce The Guides and has not done so since the Nixon administration. Instead, the federal government has been relying on individual states and class actions to force retailers to comply. The Guides provide some useful direction around pricing practices, but are worded so vaguely as to be open to interpretation.”
The point of view takes a deeper look at these nuances, delving into:
Current vs. former pricing
Manufacturer’s suggested retail price (MSRP)
Purchase of other qualifying items
Miscellaneous price comparisons
“In general, The Guides read as being slightly quaint and alarmingly non-specific. Despite this, the document does provide some direction as to which advertising practices represent good faith. In general, it defines rules based on a combination of the validity of the reference price, and/or the length of time items are offered in the market at that reference price. These federal guidelines absolutely should be considered when developing a promotional strategy and the related policies.”
State Pricing Regulations
“A survey of state regulations regarding pricing in advertising reveals some startling similarities and a few major differences. Nearly every state has a statute prohibiting the making of false or misleading statements about the reasons for, existence of, or amounts of price reductions. In fact, many state regulations employ the exact same language to describe prohibited activities. Many states have adopted rules related to former price comparisons as well (“was/now” pricing), but unfortunately there is little commonality of specifics across states.”
The paper provides examples of state regulations, including specific ambiguities and even some possible contradictions.
“As with the federal guidelines, key phrases such as “substantial sales” and “substantial period of time” are not clearly defined. Nevertheless, the state guidelines generally deal with the same matters as the federal guidelines, specifically the legitimacy of the reference price and/or the period of time the item was available at the reference price.”
“Perhaps the most significant source of potential liability comes from exposure to class action lawsuits. Class action is a type of lawsuit where one of the parties is a group of people who are represented collectively by a member of that group. These lawsuits can be brought in either state or federal courts. Class action lawsuits are sometimes initiated by members of the aggrieved group; in the case of the retail sector, this is typically dissatisfied customers. More often, attorneys identify a potential defendant based on current promotional practices and seek to identify a lead plaintiff that credibly can claim harm from the practice. Rather than seeking to create an example, class action attorneys are motivated by the desire to right a perceived wrong or to collect fees associated with a large settlement or judgement. As such, they tend to target retailers that are particularly vulnerable or likely to choose to negotiate a settlement rather than battle a lawsuit.” “In addition to financial liability, shady promotional pricing practices and the legal actions based on them can lead to customer backlash against a retailer. No retailer wants to be forced to publicly admit to misleading consumers or to accrue a reputation for deceptive pricing. The cost in terms of customer perception can be more damaging than any settlement or judgement.”
Josh goes on to outline specific steps that retailers can take to define policies and design proper business practices amid the often nebulous pricing and promotional regulations:
Understand the relevant laws for the applicable markets and their application to advertising practices
Develop succinct guidelines or policies that dictate comparative pricing practices
Strive to act in good faith with regards to pricing
Be selective and planful with promotional price discounting
To read the full point of view, we invite you to visit: www.parkeravery.com and click on Insights. Related thought leadership includes:
If you have any questions about pricing and promotional challenges as outlined here, or want to toss around some ideas about other relevant retail topics, please don’t hesitate to contact The Parker Avery Group.