In the United States, the Federal Trade Commission (FTC) is charged with protecting consumers in the marketplace. Section 5 of the FTC Act, 15 U.S.C. § 45(a)(1) prohibits companies from utilizing “unfair or deceptive acts or practices in or affecting commerce”. This standard has been applied to protect consumers from deceptive pricing schemes. With retail purchases transitioning from brick and mortar stores to e-commerce, deceptive pricing schemes are evolving and in some ways becoming more prevalent. In addition to the FTC, many states have enacted laws meant to protect consumers from deceptive advertising and pricing tactics.
Deceptive pricing, according to the FTC, is any pricing scheme that is likely to mislead consumers and affect consumers’ behavior or decisions about the product or services offered for sale. Basically, any advertising, including pricing, must tell the truth and not mislead consumers.
Deceptive pricing has been found where companies utilize marketing schemes such as:
- strike-through pricing
- bait and switch
- perpetual sales
- price anchoring
- “compare at” pricing.
These pricing practices may not, in and of themselves, be deceptive. However, where the pricing comparisons or fine print are deceptive in nature, the FTC may intervene.
For example, strike-through pricing is a common practice where retailers list the current price in comparison to a former price for the product. The former price appears with a line through it indicating that it is no longer valid. This is a great way to communicate discounts or sales to potential customers. However, if the stricken former price is not a valid indication of an actual former price of the product, the difference in price and consequently the “deal” is misleading.
The FTC has provided some guidance to sellers regarding deceptive advertising issues on their website here. Deceptive pricing schemes do cause actual problems for online retailers.
If companies are found to be utilizing deceptive pricing or advertising practices, the FTC will issue fines. Furthermore, many companies have faced civil litigation including class action lawsuits where damages can add up quickly.
In 2017, Canada levied a $1 Million fine against Amazon Canada for misleading pricing practices. They found that Amazon’s practice of comparing prices to higher “list prices” or suggested manufacturer prices (MSRPs) was merely a marketing gimmick that mislead consumers into thinking they are getting a great deal although the list price was not a prior actual price of the product. Canada’s Competition Bureau found Amazon culpable because they relied on their sellers to provide the list prices and never verified that those prices were ever accurate.
During the FTC’s review of Amazon’s purchase of Whole Foods in 2017, Amazon’s pricing was also investigated in the United States because of a letter filed with the FTC by Consumer Watchdog. Consumer Watchdog claimed that the reference prices posted on Amazon were higher than actual former prices of the products in the previous 90 days. Amazon denied the allegations. The FTC suspended its investigation of Amazon in 2017 but stated in a press release that, “Of course, the FTC always has the ability to investigate anti-competitive conduct”. This investigation highlights the FTC’s intent to follow up on complaints and investigate deceptive pricing in the marketplace.
The lesson here for online retailers is to make sure your marketing practices do not cross over the line to deceive consumers. Sellers should make sure that price comparisons including strike-through prices are an accurate representation of the actual deal the customers are receiving.
Today, online sellers have a lot to focus on. New competitors and pricing pressures, adhering to new privacy laws like the GDPR, and securing their customer data against hackers. Don’t make an FTC investigation into your advertised pricing an issue. If you have questions, have one of our Internet Lawyers review your pricing practices before the FTC does.