The Riddle of Reference Pricing

Posted on 5 Sep 2013 by The Manufacturer

While retailers carry most of the risk in pricing decisions, manufacturers being asked to support special offers need to be aware of the legality of their customers’ actions. After a spat of reference pricing scandals, Dominic Watkins, senior associate at business law firm DWF, explains the regulatory landscape for pricing.

Dominic Watkins, Senior Associate, DWF

Pricing has played an increasingly significant role in product promotion over the last few years. Gone are the days of two or three sale periods a year – we live in a world of perpetual offers.

Store shelves scream about the savings that can be achieved and consumers have come to expect more and more deals.

Retailers, and therefore manufacturers, have no alternative but to oblige.

While the majority of the risk for pricing is carried by the retailer, manufacturers will be asked to support promotional activity and they need to be aware of the issue and its potential implications – particularly manufacturers in the food and drink sector and those producing highly seasonal products with volatile costs basses linked to materials or indigent availability.

The need to promote creates a range of challenges. Events over the last few weeks – Tesco’s £300,000 fine and the OFT announcing that it has written to six furniture retailers to tell them to change pricing practices – show regulators are starting to focus more on this area.

One for one principle

The rules relating to price promotions are actually very simple: you must not mislead.

When carrying out reference pricing – ‘was/now’ type offers – the reference price must be genuine and the lower price should not be used for longer than the product was for sale at the higher price.  This has become known as the ‘one for one’ principle.

However, the rule is fairly narrow and only applies to that specific promotional mechanism, not to two for one offers or multibuy promotions. These work slightly differently, as the price of one unit is always established on the labelling, meaning this tactic can, in theory at least, be used almost indefinitely.

Another alternative is to post a notice that makes the basis of the price comparison explicitly clear.  This gives the consumer the information they need to make a decision about how good, bad or indifferent the offer is.  This is important as the consumer then has all of the necessary knowledge to make a transactional decision on the strength of the offer, thereby avoiding a breach in regulations.

Product challenges

Pricing is more challenging for certain types of products.  Soft fruit, like strawberries, is one such example due to varying supply and demand.

In the off season, the price of strawberries is high as there are fewer strawberries on the market and demand is lower.  As the season gets underway, the price drops quickly until it reaches the usual market level. The question, therefore, is whether one can advertise the price reduction from £4.99 to £1.99 as a saving, or if £1.99 is just the new price.

Tesco was recently convicted in similar circumstances, falling down on the amount of time the strawberries were available at the higher price.  The time frame simply wasn’t long enough to allow the products to be sold at the lower price for a longer period. This made it misleading, in the judge’s words:

“If a product is offered at ‘half-price’, it is implicit, implicit, that the referable full price was the normal price for the product, i.e. it had been on offer at the full amount for a much longer and established period, so as to be fairly and properly characterised as the normal price, and so would be a genuine advantageous bargain at half that price.  So in making such promotional offers it seems to me it was a matter of common sense, if something was being offered at half-price the customers were being in effect told this is a real and genuine bargain.”

Tesco had procedures in place to prevent this from occurring and accepted that these hadn’t been followed on this occasion, so it entered a guilty plea. The fine of £300,000 serves as a stark reminder that when promotional activity goes wrong, the Courts are prepared to take action.

As the dust settles around the Tesco case and the OFT’s renewed look at pricing continues, it is very likely that others will find themselves in the spotlight.

It is therefore more important than ever that both retailers and manufacturers remain vigilant and that due diligence measures supporting promotions are robust and demonstrable, otherwise significant fines are a real possibility.