The rise of the false reference price
At the beginning of this year, retailers were preparing their shareholders for a potentially rough year ahead. Customers were seeming to become more frugal as the initial wave of consumerism from the early days of the pandemic was clearly tapering off and comparing sales to this boom moving forward was going to be tough.
As predicted, retailers of all kinds, from Big Lots to Dick’s Sporting Goods, have been reporting disappointing or ‘not up to expectations’ quarterly earnings this year and are having to make difficult decisions to ensure their investors a repeat won’t happen. Target, for example, chose to rid themselves of excess inventory by offering steep discounts and taking the immediate hit to profit rather than risk a potentially bigger write-down over the longer term. This, however, meant that their second-quarter profits have dropped 90% compared to the previous year, which, on the surface, doesn’t sound great to investors.
Some retailers, rather than taking the profit hit as Target did, have turned to some common and newer deceptive practices to maintain profit margins.
One in particular is the practice of using a false reference price in advertising discounts. A shining example of this comes from a joint research study out of the University of Florida and Arizona State University that focused on retailers manipulating the reference price when framing a discount. The researchers found that a quarter of vacuum cleaners sold on Amazon temporarily increased the price whilst pretending to be offering a discount. One of the vacuums they referenced was regularly listed as $299, but then listed for a two-day period as $399 but on sale for $349. The vacuum then returned to $299 after that two-day period. So anyone who purchased the vacuum “on sale” was actually paying $50 more than if they had purchased it any other day at the regular non-sale price.
Amazon retailers aren’t alone in this. The Wall Street Journal (WSJ) reported last week an increase in lawsuits for retailers over these types of deceptive pricing strategies and while some are being dismissed, others are moving forward. The Supreme Court of Oregon ruled in July that a case could proceed against Eddie Bauer after a customer sued the company for falsely stating a 50% discount on an item that never sold for a higher price and was therefore an inflated reference price.
Deceptive pricing strategies to maintain profit and market share are nothing new. Retailers have been getting in trouble for it for as long as they have existed and many never learn from it. After all, it was only a decade ago when J.C. Penney was sued over its advertising campaigns using misleading price comparisons and now they are once again facing a class action lawsuit for using false reference points online. Even though the company settled the original suit for $50 million in 2015, they claimed it was to ‘remove uncertainties’ for shareholders and not an acknowledgment of wrongdoing.
The profits seen by many of the ‘winners’ of the early years of the pandemic such as Wayfair, Target, and Dick’s Sporting Goods simply couldn’t be sustained forever. Retailers are driven to not appear like they are losing, even if that means more lawsuits from unhappy customers. As a reporter for WSJ quoted a source saying: “Retailers will continue to promote such misleading deals, since the risk of losing market share is greater than any reputational or monetary damage they may incur from related legal cases.”
Check out the Federal Trade Commission’s regulations on price comparisons here.