Advertising of Prices Working Paper

1. Advertising of Prices Working Paper Draft proposals for discussion at the OFT roundtables 27 August 2010

2. Draft working paper Context • The OFT has been engaged in a study of the way in which price information is advertised to consumers. • The purpose of the study has been to illuminate the issue of how the average consumer thinks. • This is an important question because the Consumer Protection from Unfair Trading Regulations ('CPRs') require the OFT to consider whether an advert making a price offer has complied with the regulations by reference to whether it would mislead the average consumer. • Evidence about what misleads consumers, in different circumstances, is important to the OFT’s decisions about what cases it should prioritise for investigation.

3. Draft working paper Our research • First, we have closely examined the evidence on price framing from the field of behavioural psychology. This research has already been published on our website along with an experimental study into price framing - http://www.oft.gov.uk/OFTwork/markets-work/current/advertising-prices/ • Second, we have undertaken an extensive survey of consumer attitudes and behaviours in relation to price offers. • We have also published a paper discussing how this research relates to the CPRs – this is also available from our website. • The following slides set out, in the light of the research we have undertaken, a series of proposals with respect to price offers.

4. Draft working paper The purpose of the roundtables • The ideas contained within this slide pack are still in draft and for discussion at the series of roundtables the OFT is holding in September / October. • Based upon the research findings obtained over the summer we set out here a series of ‘straw men’ that we wish to stress test with industry before drawing our final conclusions. • Every industry is different. Please look at the proposals carefully and consider whether the proposals are reasonable / workable for your industry.

5. Draft working paper Framework for interpretation • The draft guidance set out here is not intended to become ‘hard and fast’ rules - only a Court can give a definitive ruling on the meaning of the law. • The CPRs are principles based legislation – our aim is to provide guidance for the benefit of businesses, consumers and our enforcement partners. • On the following pages we set out some principles that we intend to apply when deciding whether or not to take enforcement action, which summarise our current views on how the CPRs apply to advertising and pricing. • The purpose of the proposals is to help those involved with the design of adverts and price promotions and not to change the underlying business model. • The intention is not to prevent the use of price framing per se. If price framing is used in conjunction with provision of the appropriate information and does not mislead consumers, it is unlikely to breach the CPRs.

6. Draft working paper Drip Pricing Proposals with respect to drip pricing: • All compulsory charges (including taxes) must be in the headline offer price. • Where there are a range of alternatives for a compulsory element of the product or service (e.g. the delivery method) the cheapest option available to at least 50% of consumers should be included in the headline price – with alternatives clearly listed and costed*. • Total price should be clearly displayed prior to payment being accepted. • Consumers should not be automatically opted-in or opted-out rather presented with neutral boxes to ensure they actively make a choice. * For example, product X may come with a compulsory delivery charge. For some customers the delivery charge is waived because they agree to take delivery on a week day during working hours but charges apply for delivery at other times. The principle outlined at (2) above suggests that if 50% of consumers took advantage of the free delivery it would be acceptable to exclude the delivery charges from the headline price. However, if only 25% of consumers took advantage of free delivery then the charges for delivery should be included in the headline price.

7. Draft working paper Drip Pricing (stress testing) Questions for stakeholders: • Would having all compulsory charges (including taxes) in the headline prices offer sufficient flexibility to businesses with a proportion of trade customers? • Is the suggestion for the most representative charge for compulsory surcharges workable? We have suggested this is the minimum charge paid by at least 50% of customers. If not, what other measures might be considered representative of the ‘typical’ surcharge? • Are there any circumstances in which it could be impractical or unhelpful to display the total final price prior to purchase? Are there products where the customer knowingly concludes a transaction without expecting to know the total final price? • How does our proposals with respect to option boxes affect businesses that offer significant customisation? Is a more flexible approach to allow traders to choose what works for them but require charges associated with pre-selected options to be included in the upfront headline price?

8. Draft working paper Reference Pricing Proposals with respect to reference pricing: • Traders should always use the most valid reference. RRP only likely to be most valid where a ‘was’ or External Reference Price (ERP) is not available. • ‘Was’ prices should be established relative to the length of the sale (i.e. no shorter than the sales period or ‘continuous’ price establishment*). • ‘Was’ prices should be established in at least 50% of outlets (by volume) that go on to use the offer price. • Traders using reference prices must state if they have sold the product at a lower price in the 3 months prior to the offer starting. • ERPs must state the date of the comparison and be kept current as far the medium allows. • Generally, ‘After Sales Prices’ should be avoided and where they are used strictly adhered to. If the trader wishes to retain flexibility over the post-sale price then an ASP offer is unlikely to be appropriate. • RRPs should be set at a price at which viable levels of sales have been made. • Manufacturers should provide identical RRPs for all traders selling technically identical items. * Continuous price establishment can be achieved by contemporaneously selling a significant proportion of the product or service that is on offer at the reference price.

9. Draft working paper Reference Pricing (stress testing) Questions for stakeholders: • Is the suggestion to use ‘was’ prices or ‘ERP’ prices in preference to RRPs workable? Does it allow for introductory offers? • Is the suggested flexible approach to price establishment helpful? Or is the ‘28 day rule’ preferred? • If a product has been price established in a different store to the store making the offer is it sufficient that at least 50% of stores making the offer have done so? • Some traders already state if a lower price has been available in the prior three months. Should this become the standard? • What practical difficulties are presented in keeping ERPs current? • ‘After Sales Prices’ would clearly need to follow the same price establishment period as a ‘was’ price offer in order to achieve consistency. How realistic is it that a trader can strictly adhere to this? • How far can retailers ‘police’ the RRPs they are given? What reassurance / evidence do manufacturers typically give that their RRPs represent true selling prices?

10. Draft working paper Time Limited Offers Proposals with respect to time limited offers: • Traders should clearly state the start and end dates of all price offers. • The end date of the sale should not usually be extended unless for reasons beyond the traders control (such as extreme weather, industrial action, delays in supply chain). • Traders who anticipate that they will extend a TLO if it performs better or worse than expected should consider carefully whether, in the light of that expectation, the offer is indeed time-limited and whether it would be more accurate to present the offer as a stock-limited offer if the intention is to clear stock or achieve a certain level of sales.

11. Draft working paper Time Limited Offers (Stress testing) Questions for stakeholders: • What issues might arise from the suggestion that time limited offers be restricted to promotions that are strictly time limited with defined (and public) start and end dates? • Is the suggested distinction between time-limited and stock-limited offers helpful? In practice where are the boundaries of this distinction?

12. Draft working paper Volume Offers Proposals with respect to volume offers: • Volume offers must be based on genuine ‘was’ prices. • Volume offers should observe the guidance on ref pricing, in particular the price establishment period. • Where volume offers are more expensive per unit than stand alone offers the trader should make no attempt to disguise this (using different bases for unit comparisons is not acceptable). • Traders should provide unit comparisons – in line with the Price Marking Order – for sale prices, not pre-sale prices.

13. Draft working paper Volume Offers (Stress testing) Questions for stakeholders: • Are there any circumstances where requiring a volume offered to be based on a price established product would prevent the offer being made? • What alternatives exist for establishing a meaningful reference price for volume offers? • What difficulties do traders experience in complying with the Price Marking Orders?

14. Draft working paper Baiting sales Proposals with respect to bait pricing: • Volume limited offers must be clearly labelled as such – it may not be sufficient to simply state ‘hurry while stocks last’ - an indication of availability in units at the start of the offer may be required if availability is very restricted. • Ultimately, traders must compare the volume of stock available to the scale and scope of the promotion / advertising they are undertaking. A nationwide campaign supported only by a handful of offer items is unlikely to be acceptable. • As a rough rule of thumb if traders have less than 50% of stock or anticipated demand (whichever is larger) at the offer price then they should draw attention to the volume available in their adverts. • Internet traders must make links to advertised deals available directly from their home page / landing page – to do otherwise may be considered a breach of the annexe practice outlawing traders from refusing to demonstrate or show goods. • Reasonable effort must be made to remove adverts if the offer no longer available – this is especially true of internet offers. • Prices displayed as ‘from’ where only some of the stock is to be sold at the lower price must also display a ‘to’ price. Traders using algorithmic pricing systems that might lead to only a small proportion of the stock being available at the advertised price should observe these principles.

15. Draft working paper Baiting sales (Stress testing) Questions for stakeholders: • Do traders foresee any difficulties in revealing the amount of stock available for extremely limited stock offers? • Is the suggestion that the trader use the scale and scope of their marketing as a reference point for deciding the degree to which an offer is stock-limited sufficiently flexible? • Are there any circumstances in which links to advertised deals available directly from their home page / landing page would be impractical? • How far should reasonable effort’ extend with respect to removing adverts that promote stock no longer available at the advertised price? • Should this extend to email based marketing? • Are there any products where ‘from’ and ‘to’ prices cannot be calculated or would not be meaningful?

16. Draft working paper Free Offers Proposals with respect to ‘free’ offers: • Traders using the word ‘free’ where there is an exchange of money should ensure that the ‘paid for’ product can be referenced against a ‘was’ price or an ERPs. • The ‘was’ price or ERP price for the ‘paid for’ product must have been established as a stand alone item. • The offer price must not be higher than the ‘was’ or ERP price for the stand alone ‘paid for’ product i.e. the free product must incur no additional charge. • Offers which state a value for the ‘free’ product must be price established. • If the ‘paid for’ product is simultaneously available as a standalone paid for product the standalone price must not be less than the price when combined with the ‘free’ product. The same logic should be extended to any substantively similar product that is also simultaneously available.

17. Draft working paper Free Offers (Stress testing) Questions for stakeholders: • Are there any circumstances where price establishing the ‘paid for’ element of a free offer would prevent the offer being made? • Is the general principle of price establishing ‘free’ offers widely applicable?

18. Draft working paper Complex pricing (bundling) Proposals with respect to complex pricing: • Traders should provide a ‘total cost of deal’ price, covering those elements of the deal that have a fixed total price. • Traders offering contracts should provide an ‘average monthly’ price of contract, covering those elements that have a fixed price. • The ‘total cost of deal’ and ‘average monthly’ prices should be based upon all the compulsory components of the offer.

19. Draft working paper Complex pricing (Stress testing) Questions for stakeholders: • Are there any circumstances in which the provision of the suggested additional information in relation to complex pricing likely to make consumers more confused? • Should the OFT distinguish between complex pricing where the underlying product is essentially simple / straightforward and complex pricing where the underlying product is complicated? • Should the OFT focus on price obfuscation irrespective of whether the product is simple or complicated?

20. Draft working paper Price Comparison Sites Proposals with respect to Price Comparison Sites (PCS): • PCS should provide easily accessible clear information to consumers on how they are funded, including highlighting any links that are sponsored. • PCS should clearly state how many retailers / providers they compare at the top of each search and provide a clear and easily accessible link to a list of retailers compared. • PCS should provide easily accessible clear information to consumers on how often their prices/deals/searches are updated. • PCS should take reasonable measures to ensure that the price quoted on their site is available and that there are no compulsory add-on costs from the provider. • PCS should limit as far as is practical making any assumptions about the circumstances of the consumer and where assumptions are made provide a clear link to consumers to allow them to see and alter these assumptions. • Where prices are reported they must reflect the product criteria searched for including using any assumptions made on the users behalf in a consistent manner. • Where a PCS has itself levied a charge this should be clearly identified and not presented as part of the charges levied by the retailer / provider.

21. Draft working paper Price Comparison Sites (Stress testing) Questions for stakeholders: • Would additional information on how PCS are funded help clarify consumer confusion over the independence of search listings. Is it reasonable to require affiliate links to clearly indicate that they are commercially sponsored? • Are there any practical difficulties around providing to consumers the number of providers / retailers that have been compared? • Are there any practical difficulties around the suggestion that PCS take reasonable measures to ensure that the price quoted on their site is available and that there are no compulsory add-on costs from the provider. Is this more practical for some products than others? If it is not possible to check should search results contain a clear warning that additional charges may be due? • Are the suggested principles with respect to assumptions made on the users behalf practical. Are there technical difficulties with strict ‘like for like’ comparisons?

22. Draft working paper Application and enforcement • The proposals set out in these slides are draft for stress testing with industry. They will be finalised in the light of consultation with industry stakeholders. • Once finalised we intend this guidance to be a starting point for traders to assess their own pricing practices and provide guidance about when the OFT might consider enforcement action. • Each price offer will be judged on its specific merits and in its specific context. • However, traders departing from the finalised guidance may wish to reassure themselves that they have a clear case for doing so. • In particular, traders may wish to consider whether they are in possession of any information or data that supports the case for taking a different approach to the finalised guidance.