FTC Deceptive Pricing Guides

The FTC’s Deceptive Pricing Guides address different types of pricing representations.  These include, without limitation, representations that a current price is a sales price or a discount from the former price, comparison prices and special prices based upon the purchase of other products (e.g., Buy-One-Get-One - “BOGO” offers).

As a general rule, advertisers must take care not to promote a price as being something special or different if it is, in fact, not true.

Former Price Comparisons

One of the most commonly used forms of bargain advertising is to offer a reduction from the advertiser’s own former price for an article.  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.

However, 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/she expects.  In such a case, the “reduced” price is, in reality, probably just the seller’s regular price.

As indicated in the Guides, a former price is not necessarily fictitious merely because no sales at the advertised price were made.  Advertisers must be careful in such a case and ensure 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, of course, not for the purpose of establishing a fictitious higher price on which a deceptive comparison might be based.

Advertisers should also vigilantly avoid any implication that a former price is a selling, not an asking price (e.g., by use of such language as, “Formerly sold at $X”), unless substantial sales at that price were actually made.

            Example of Price Comparison Based on Fictitious Former Price

John Doe is a retailer of Brand X fountain pens, which cost him $5 each.  His usual markup is 50 percent over cost; that is, his regular retail price is $7.50.  In order subsequently to offer an unusual “bargain,” Doe begins offering Brand X at $10 per pen. He realizes that he will be able to sell no, or very few, pens at this inflated price.  But he doesn't care, for he maintains that price for only a few days. Then he “cuts” the price to its usual level—$7.50—and advertises: “Terrific Bargain: X Pens, Were $10, Now Only $7.50!”  This is obviously a false claim. The advertised “bargain” is not genuine.

Other examples of advertised “bargains” that are not genuine can include, without limitation, the use of a price at which an article was never offered at all, featuring a price that was not used in the regular course of business, featuring an article that was not used in the recent past but at some remote period in the past and not disclosing that fact, use of 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., the 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 represents that an item has been “Reduced to $9.99,” when the former price was $10, is misleading the consumer, who the FTC believes will understand the claim to mean that a much greater, and not merely nominal, reduction was being offered.

Retail Price Comparisons and Comparable Value Comparisons

Offering goods at prices lower than those being charged by others for the same merchandise in the advertiser's trade area (the area in which it does business). Is a commonly used form of bargain advertising.  The advertised higher price must be based upon fact, and not be fictitious or misleading.

“Whenever an advertiser represents that he is selling below the prices being charged in his area for a particular article, he should be reasonably certain that the higher price he 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,” the Guides state.

For example, 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,” according to the Guides.

The Guides also provide an example that illustrates a misleading use of this advertising technique. Retailer Doe advertises Brand X pens as having a “Retail Value $15.00, My Price $7.50,” when the fact is that only a few small suburban outlets in the area charge $15.  All of the larger outlets located in and around the main shopping areas charge $7.50, or slightly more or less.  The advertisement here would be considered deceptive because the price charged by the small suburban outlets would have no real significance to Doe's customers, to whom the advertisement of “Retail Value $15.00” would suggest a prevailing, and not merely an isolated and unrepresentative, price in the area in which they shop.

Another type of bargain advertising is offering 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.

The FTC has stated that 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.  However, advertisers must 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.

The Guides provide an 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.

Advertising Retail Prices Which Have Been Established or Suggested by Manufacturers - or Other Nonretail Distributors

According to the Guides, 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, the Guides state, if a reduction from this price is advertised, many people will believe that they are being offered a genuine, bona fide 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.

Manufacturers' suggested retail or list prices are advertised by numerous methods.  For example, large scale (often nationwide) mass-media advertising by the manufacturer itself, pre-ticketing by the manufacturer; direct mail advertising; distribution of promotional material or price lists designed for display to the public.

According to the Guides, there would be little problem of deception in this area if all products were invariably sold at the retail price set by the manufacturer.  “However, the widespread failure to observe manufacturers' suggested or list prices, and the advent of retail discounting on a wide scale, have seriously undermined the dependability of list prices as indicators of the exact prices at which articles are in fact generally sold at retail.” the Guides state.

This does not mean that all list prices are fictitious.  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 (the area in which he does business).

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 “clear and serious danger” of the consumer being misled by an advertised reduction from this price.

According to the Guides, 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.

Differences should be noted.

For example, 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 is responsible for ascertaining whether the list price is in fact the price regularly charged by principal outlets in his area.  “A retailer who advertises a manufacturer's or distributor's suggested retail price should be careful to avoid creating a false impression that he is offering a reduction from the price at which the product is generally sold in his trade area.”

The Guides state that “[i]f 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 deceptive.”

Conversely, a manufacturer or other distributor who does business on a large regional or national scale cannot be required to police or investigate in detail the prevailing prices of his articles throughout such 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 his trade area, it will not be chargeable with having engaged in a deceptive practice, the Guides state.

For example, manufacturer Roe, who makes Brand X pens and sells them throughout the United States, advertises his pen in a national magazine as having a “Suggested Retail Price $10,” a price determined on the basis of a market survey.  In a substantial number of representative communities, the principal retail outlets are selling the product at this price in the regular course of business and in substantial volume.  Roe would not be considered to have advertised a fictitious “suggested retail price.”  If retailer Doe does business in one of these communities, he would not be liable for a deceptive practice by advertising, “Brand X Pens, Manufacturer's Suggested Retail Price, $10, Our Price, $7.50.”

The takeaway is that manufacturers, distributors and retailers must always act honestly and in good faith in advertising a list price, and not with the intention of establishing a basis, or creating an instrumentality, for a deceptive comparison in any local or other trade area. “For instance, a manufacturer may not affix price tickets containing inflated prices as an accommodation to particular retailers who intend to use such prices as the basis for advertising fictitious price reductions,’ the Guides state.

Bargain Offers Based Upon the Purchase of Other Merchandise

Offering customers additional merchandise upon the condition that he/she purchase a particular item is a method often used by advertisers.  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.

The seller is not literally offering anything for “free” or ¹⁄₂ free, or for only 1¢.  There is a condition attached – purchasing an item.  Unless done properly, such offers can easily and inadvertently become misleading.

“Where the seller, in making such an offer, increases his regular price of the article required to be bought, or decreases the quantity and quality of that article, or otherwise attaches strings (other than the basic condition that the article be purchased in order for the purchaser to be entitled to the “free” or “1¢” additional merchandise) to the offer, the consumer may be deceived.” the Guides state.

Accordingly, whenever a “free,” “2-for-1,” “half price sale,” “1¢ sale,” “50% off” or similar type of offer is made, all the terms, conditions, limitations and exclusions of the offer should be clearly and conspicuously disclosed at the outset.

Miscellaneous Price Comparisons

The practices covered in the provisions set forth above represent frequently employed forms of bargain advertising.  However, there are numerous variations controlled by the same general principles.

For example, retailers should not advertise a retail price as a “wholesale” price.  Nor should they  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 seconds or 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 create a false sense of urgency by making a “limited” offer which, in fact, is not limited.

The possible scenarios are too numerous to mention.  Regardless, advertisers should consult with an experienced FTC lawyers in order to minimize the risk that the bargain offer is genuine and truthful.

FTC Guide Concerning Use of the Word "Free"

The FTC Guide Concerning the use of the word "Free" and similar representations is a covers the offer of "Free" merchandise or service as a promotional device used to attract customers.  When making "Free" or similar offers all of the terms and conditions upon which one can receive and retain the “Free” item should be set forth clearly and conspicuously at the outset of the offer so as to leave no reasonable probability that the terms of the offer might be misunderstood.

Takeaway

Before advertising a discount price, a seller must offer an item in good faith at a price for a reasonable, substantial period of time and in the regular course of business.  When comparing to others’ prices, whenever an advertiser represents that it is selling below the prices being charged in its area for a particular article, 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.  Offers based upon the purchase of other products, like a BOGO offer, if the advertiser increases his regular price of the article required to be bought, or decreases the quantity and quality of that article, or otherwise attaches strings (other than the basic condition that the article be purchased in order for the purchaser to be entitled to the “free” or “1¢” additional merchandise) to the offer, the consumer may be deceived.