Can You Trust Sale Prices?

Several retailers are currently facing lawsuits over their use of inaccurate or misleading “compare at” sale prices. In many of these cases, consumers took action after finding out that products they bought were being sold at sale prices that drew comparisons to fictional “full” prices. The result? Savings that didn’t actually reflect any money saved and retailers allegedly profiting off decisions that were only made because customers assumed stores were being honest about the deals they offered.

Used properly, sale prices and comparison prices are a great way to judge whether something is being sold at a good price, or if the store you’re in is the best place to shop. While retailers are clearly willing to smudge the truth, the law has always been clear on how and when price comparisons can be used. ClassAction.org took a closer look at what companies are legally allowed to say about sale prices.

The Federal Trade Commission regulates sale and advertising price listings and its Guide Against Deceptive Pricing sets out the relevant regulations. These rules cover four distinct areas:

• Prices that compare to the retailer’s own prices
• Prices that compare to competitors’ prices
• Prices that compare to manufacturer-recommended prices
• Prices based upon special offers involving other goods

These distinctions are important, and companies must ensure that their sale prices aren’t going to mislead customers. Manufacturer-recommended prices, for example, are typically higher than a store’s competitor prices – meaning that sales comparing a store’s prices to the manufacturer’s prices can appear to offer a larger saving than a price that compares to a competitor. If shoppers know which two prices are being compared, they can make informed decisions. If things aren’t clear, shoppers may think they’re getting a better deal than they actually are.

So – what does the law actually say?

Former Price Comparisons

Retailers are free to compare a product’s current price with a former price as long as – and this is crucial – “the former price is genuine.” If the former price is fictitious, the FTC considers that consumers are no longer receiving the expected value and that the retailers may be acting illegally. A fictitious price is one at which the product was never sold. While there’s no minimum period of time at which items must be sold at a particular price, FTC guidelines state that products should be available at the former price “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.”

It’s also illegal to make a “reduction” that’s essentially meaningless - so, a sale price that claims the item is “reduced to $9.99” cannot be used if the item’s original price was $10.

Retail Price Comparisons

Retailers who wish to advertise their prices compared to a competitor’s have a duty to ensure the price comparison is factual and reflects the product’s true value. What does this mean? According to the FTC, retailers can only quote a competitor’s price if that price is reasonable and reflects a price at which consumers can commonly purchase the item. The reason the FTC expects all prices to reflect real-world sales is simple: if one small shop happens to sell Product X at a hugely inflated price – say, a $10 pen being sold for $30 – some stores would then be able to advertise a sale by saying “Price elsewhere: $30. Our price: $8.50.” That looks like a great deal, but the fact is, nowhere but a single store is selling the pen for $30. So, retailers have a duty to make sure retail prices are genuine and reflect an item’s reasonable price before they use them to compare sale prices.

Manufacturer Price Comparisons

This one’s a bit tricky – mostly because, as the FTC explains, “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.” This is not really true: a substantial number of sales on most products sold in the United States are below manufacturer prices, and as such, sale prices that compare store and manufacturer prices may mislead consumers in to thinking they’re getting a better deal than they really are. As the FTC says:

“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. Changing competitive conditions have created a more acute problem of deception than may have existed previously. Today, only in the rare case are all sales of an article at the manufacturer's suggested retail or list price.”

For a manufacturer price to be considered factual, it must:

• Be used in the principal retail outlets that do not conduct their business on a discount basis.
• Be 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).

Manufacturers are also banned from affixing inflated prices in order to allow retailers to offer reductions on the higher price.

Bargain Based Sales

Bargain based sales are any sales that require the purchase of additional items – so, buy one get one free, two for one, half price sales, etc. In these sales, companies cannot either increase the price of the mandatory purchase, or decrease the quality or quantity of the item compared to regular sales. So, if a sweater is regularly sold at $10 and the item becomes part of a buy one get one free sale, the retailer cannot simultaneously increase the sweater’s price to $15. Equally, if items are regularly sold at a certain quantity – two socks, for example – sales cannot operate by offering a single sock and requirement full price for the second.

After all, who’d want one sock?

For a state-by-state guide to pricing laws, see this guide (last updated 2009) published by the National Institute of Standards and Technology. Not every state has specific laws, and as always, federal laws apply across the country.