Discounts, sales and coupons are great ways to boost sales transactions, especially during low periods or when you are trying to get rid of overstock. According to one estimate, 96% of consumers have used a coupon in the past 90 days. These types of promos can help your business incentivize repeat visits, upsell a low-volume product and otherwise reward customers for their brand loyalty.
However, before you host a sale or offer a coupon discount, make sure you’re aware of the legal regulations in place to protect customers. Here are some legal issues to know before launching a sale or coupon at your venture.
Background: promotional pricing and fair advertising
Discounts, sales, coupons and other forms of promotional pricing are governed by the Federal Trade Commission (FTC) and regulations at the individual state level. The FTC rules can be found in the Guides Against Deceptive Pricing, commonly known as “The Guides.” The Guides aim to protect customers from deceptive pricing by requiring businesses to offer an item at a fair price, for a reasonable period of time and in good faith before lowering the price to encourage sales.
“The FTC considers it deceptive to offer an item for sale at a higher price for a short period of time in order to support a claim that an item is discounted when the price is then lowered,” Thomson Reuters Practical Law states.
The Guides, however, are not prescriptive: The FTC has not taken action to enforce these regulations since the Nixon administration. As a result, businesses are liable to class action lawsuits or enforcement by individual state regulators. For instance, in 2017, the advocacy group Consumer Watchdog asked the FTC to look into deceptive pricing by Amazon. Consumer Watchdog’s analysis found that in 61% of products with reference prices, Amazon’s reference prices were higher than prices for the same product in the previous 90 days.
“Consumer Watchdog argued that the deceptive list prices make Amazon prices look like a bargain, and asked the FTC to stop Amazon from buying Whole Foods while the deceptive discounting is occurring,” reported Reuters.
The bottom line: Do not artificially inflate prices to later make it seem like you’re offering a price reduction.
What types of discounts are considered deceptive?
One way to avoid a deceptive pricing lawsuit is to stay away from former price comparisons. A former price comparison is a type of “was/now” pricing that makes a deal look better than it really is. Here’s an example of what this might look like, described in the FTC regulations:
John Doe is a retailer of Brand X fountain pens, which cost him $5 each. His usual markup is 50 percent over cost; that is, his regular retail price is $7.50. In order subsequently to offer an unusual “bargain,” Doe begins offering Brand X at $10 per pen. He realizes that he will be able to sell no, or very few, pens at this inflated price. But he doesn’t care, for he maintains that price for only a few days. Then he “cuts” the price to its usual level—$7.50—and advertises: “Terrific Bargain: X Pens, Were $10, Now Only $7.50!” This is obviously a false claim. The advertised “bargain” is not genuine.
The FTC also has specific guidance around the use of the word “free” in a promotion. When making a “free” offer, merchants must set forth “clearly and conspicuously at the outset of the offer” all the terms and conditions that a customer must meet in order to receive the free item. There should be “no reasonable probability” that the offer might be misunderstood.
[Read more: Using Direct Mail to Promote Your Business? How to Get Started]
How to avoid a deceptive pricing lawsuit
Again, the FTC can do little to enforce its guidance against deceptive pricing. However, you can open your business to the risk of a lawsuit if customers believe you are using price inflation or confusing coupon terms and conditions to trick people into buying more.
The best option when running a sale or discount is to make sure you’re offering genuine value to your customers. Sale prices should be meaningful and significant. “The price reduction should be sufficiently large enough that the consumer would believe they were receiving a genuine bargain if they knew the amount of the price reduction,” wrote Thomson Reuters.
The bottom line: Do not artificially inflate prices to later make it seem like you’re offering a price reduction. Make sure that discounts are only used after offering the product at a normal price for a reasonable amount of time. And, when offering a coupon, make sure that the terms and conditions are clear and easily understandable.
[Read more: 7 Ways Your Business Can Get Ready For Black Friday (It’s Not Just for the Big Guys)]
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Published October 28, 2021