OFT publishes warning on misleading price practices

On 1 December 2010 the OFT published a market study into price-based advertising, and urged businesses to comply with fair trading laws or otherwise to risk enforcement action.

The Advertising of Prices study follows the publication of the OFT’s discussion paper on the subject in May this year and ranked the following pricing practices in order according to their assessment of the potential to mislead consumers:

• Drip/partitioned pricing
• Time limited offers
• Baiting sales and complex offers
• Reference pricing
• Volume offers

The OFT has explicitly recognised that advertising prices is “a key part of active price competition which benefits both consumers and the economy” and stressed that the above list represents its views about the potential for the pricing practices to mislead; however, the use of these practices will not automatically render an advert misleading. Accordingly, the OFT has published a new framework which sets out the criteria it will use to prioritise enforcement actions against traders. It has urged organisations to review their pricing practices and “to get their houses in order where necessary”.

The OFT will consider a number of general factors when assessing whether to take enforcement action. As well as the practice having the potential to mislead, the OFT will consider whether the specific implementation of the practice is likely to cause harm to consumers (for example by omitting to give consumers key information) and relevant characteristics of the product and market. In assessing this, the OFT will consider such information as the ease with which customers can make comparisons and independently verify the quality of goods and the chance of customers making “shopping errors” in respect of price, retailer, quantity.

The OFT has also highlighted the importance of taking into account the average consumer’s reasonable expectations and compliance with the BIS (formerly BERR) Pricing Practices Guide and relevant CAP Codes.

The study also examined Price Comparison Sites and the danger of such websites misleading consumers as to the identity of traders operating or advertising on the site or the price of characteristics of a trader’s products.

1. Drip/Partitioned Pricing

Drip or partitioned pricing, where extra charges are added to the headline advertised price throughout the purchase process, can offer significant consumer benefits by allowing consumers to tailor products or services to their requirements. However, the OFT found that when drip pricing is used in a misleading manner, it can lead to “high levels of consumer detriment”. The OFT’s core concern is that consumers may shop around less and potentially not obtain the best value for money because they are misled by the initial headline price. The OFT has therefore stated that it is less likely to consider enforcement action against a trader where the trader has:

• included all compulsory charges in the upfront price;
• given information with the headline price about compulsory elements of a product that attract variable charges (e.g. payment methods);
• clearly displayed the total price payable prior to payment being accepted;
• included in the headline price any additional charges associated with automatically opting consumers into extras.

Where a trader pre-selects options for consumers, the costs associated with the selection of those options should be included in the headline price. Where there are genuinely variable costs associated with the purchase of a product or service, these should be flagged with the headline price and consumers should be directed to a schedule of options and charges.

2. Time-Limited Offers

The Consumer Protection from Unfair Trading Regulations 2008 (“CPRs”) classify making false statements that products are only available (or only available on specific terms) for a limited time as a prohibited (“always unfair”) unfair commercial practice under regulation 3 and Schedule 1.

The OFT has indicated that, when time limited offers are used to demonstrate deals that are genuinely only available for the stated length of time, they can be an efficient way of communicating price offers with consumers. However, the OFT is concerned about circumstances where a trader advertises a specific period of availability of an offer, but then potentially misleads consumers by not giving due notice if the end-date of that offer is extended or by repeatedly extending the end-date. The OFT has stated that it is less likely to take enforcement action against traders who use time-limited offers if they:

• give consumers due notice of any extension to the offers;
• tell consumers how many times an offer has been extended (if applicable).

3. Bait Pricing and Complex Pricing

The OFT noted that bait pricing, where traders offer a stock of goods that is too small to meet demand, has a clear effect on consumers’ shopping decisions, as they are likely to buy either the advertised product at a higher price or an alternative, more expensive product from the same trader. Bait pricing is an “always unfair” commercial practice prohibited under regulation 3 and Schedule 1 of the CPRs. The OFT stated that it has “not discovered any possible efficiencies associated with bait pricing”. The OFT market study does not issue guidance as to situations in which the OFT would be less likely to take enforcement action in relation to bait advertising. It does, however, indicate that it the OFT is less likely to take enforcement action in relation to a stock limited offer where the trader follows the BIS Pricing Practices Guide, the CAP Code and the BCAP Code. Retailers’ attention is specifically drawn to sections 3.28 and 3.29 of the CAP code (which relate to stocks and marketing availability) and to the CPRs.

Complex pricing is defined as offers where the unit price is difficult or impossible to determine because it depends on a compound offer, for example multi-part pricing (where the advertised product comprises two or more parts with separate prices) and bundled pricing (where there is a single headline price for a product comprised of a number of units which may or may not be available separately). The OFT noted that this advertising can be efficient and convenient for consumers, but can also result in confusion. The OFT’s core concern is that prices may be presented in such a manner as to “obfuscate the full commitment the consumer is making”. However the OFT has stated that it is less likely to consider enforcement action where a trader:

• states the full minimum financial commitment that a consumer must make to partake;
• provides information in a manner that allows consumers to compare products.

4. Reference Pricing

The OFT’s core concern relating to reference pricing (where a trader refers to its headline price as compared to a more expensive price previously charged by it, recommended by the manufacturer or charged by a competitor) is that consumers will be misled if they use an inaccurate reference price as an indication of quality.

When considering whether to prioritise an advert for enforcement action, the OFT has indicated that it is less likely to take action where a trader:

• ensures that recommended retail prices reflect actual sale prices;
• establishes or substantiates that the “was” price applied in all outlets that refer to that reference price;
• states the name of the retailer against whose price the trader is comparing and the date of the comparison, as well as keeping the advert current as far as possible;
• establishes and substantiates the reference price for a period that is relative to the length of the sale period, to ensure that the sale period is not longer than the non-sale period. (i.e. that the higher reference price applied for a longer period than the promotional reduced price). This is subject to the minimum 28 days’ price establishment period. The BIS Pricing Practices Guide indicates that a price used as a basis for comparison should be the most recent price available for 28 consecutive days or more, unless the nature of the product or circumstances render this unreasonable (such as in the case of food items).

5. Volume Offers

Volume offers, where consumers are offered better prices if they purchase more products, are potentially harmful where the unit price of the product has been manipulated, and as a result consumers are misled as to the savings they are making. The OFT has indicated that it is more likely to consider enforcement action where a trader:

• temporarily increases the unit price of products in a volume deal;
• presents larger packs as being better value, when in fact the unit price is higher;
• implies (including by omission) that an element is “free”, when in fact the price establishment of the “free” product is historic. (The OFT gives the example of Product A, which was previously selling for £10, but the price of which has subsequently fallen to £8. In addition to the stand-alone offer for Product A the retailer offers a bundled deal of Product A plus Product B for £10, and in doing so describes Product B as “free”. Assessing the offer contemporaneously, Product B is not free);
• does not provide advice to consumers where the meaning of “free” is ambiguous;

As well as considering a trader’s compliance with the BIS Pricing Practices Guide and the CAP Codes, the OFT will also consider whether a trader has followed the Price Marking Order. In addition to the provisions of the CAP and BCAP Codes, CAP’s Copy Advice team has issued a useful Help Note on traders’ use of “free” claims. A link to the Help Note can be found here.

Conclusions

This report serves as a reminder to advertisers that pricing is a complex area. There are a number of reference documents and guides that traders must take into account to avoid falling foul of consumer protection legislation and to minimise the risk of enforcement action being taken against them by the OFT. Indeed. the OFT specifically states that the risks of consumers being misled by the practices set out in the report is likely to be reduced if an organisation adheres to guidelines such as the BIS Pricing Practices Guide and the ASA’s Code on Advertising Practises.

Retailers should take care to be as transparent and fair as possible when using the above, and indeed other, pricing methods to promote goods and services. Traders must be fair to consumers; in doing so they must provide consumers with price information that will assist consumers in making informed and efficient decisions and must also ensure that they do not pass on materially inaccurate pricing information.