The New York Times recently reported on the prevalence of misleading retail reference prices — an umbrella term that encompasses the list price, original price, manufacturers’ suggested retail price, etc.
Reporter David Streitfeld checked some 20 online retailers of a Le Creuset skillet and found reference prices ranging from $250 to $285. But most of the retailers (including Le Creuset’s own site) actually sell the skillet for $200. This disparity shows why reference prices have little value for consumers.
In theory, sellers should be able to set whatever reference price they please. Such a price makes no pledge to represent the fair market value of a product. For the seller, the price is aspirational.
The reality is trickier.
Retailers commonly show a reference price and a much lower “our price” — meant to persuade consumers that they’re getting a good deal. This comparison is only meaningful when a reference price reflects the true market value. It’s misleading to inflate a reference price to trick consumers into believing that they’re getting a bargain.
The ubiquitous use of the “reference compared to our low price” strategy highlights a consumer challenge: It’s difficult to value a product or service. Determining whether a price is a good deal is time-consuming. It involves comparing the attributes and prices of rival products. Consumers use reference prices as a shortcut.
Some price comparisons are honest — genuine sales or closeouts, for example. But the value of these true discounts can get lost amid our cynicism about reference prices’ veracity. Trustworthy price comparisons would make shopping much easier. They’re akin to listing calorie counts on fast-food restaurant items — helpful to consider when making a purchase.
So what should be done? When a retailer uses a reference price/our price comparison, efforts need to be taken to ensure that it’s valid for consumers. The U.S. Federal Trade Commission has regulations on the books, but they aren’t rigorously enforced. A straightforward fix would be to require retailers to provide additional information on the price tag — say, the lowest price at which the retailer has ever sold the product.
Requiring additional information on price tags can make comparisons meaningful to consumers and, as a result, make the buying process more efficient. Caveat emptor.
(Rafi Mohammed is a pricing strategy consultant.)
