OFT warns against unfair pricing practices

2 December 2010

The Office of Fair Trading has asked a variety of firms to review their pricing practices following the publication of its market study into the advertising of fair prices.

All companies that supply goods and services - from online retailers and high street giants, to price comparison websites and airline companies - use various price techniques to increase custom. The aim of this report was to investigate whether or not these strategies are fair to consumers.

Using consumer surveys, focus groups and psychological and behavioural economics research, the OFT has identified certain pricing techniques that can influence consumers into making a purchase decision they may not have made, or spent more than originally intended, had the prices been clearly advertised.

Given the difficulty in measuring the cost off these practices, the OFT is reluctant to give precise figures but says it would go into the billions.

The pricing practices highlighted are drip pricing; where extras are added onto the original price and customers are unaware of the full price they have to pay; bait sales, where customers are lured in with a discount price, only to discover the discount has run out or only applies to a few items; complex pricing, such as bundle packages or tariffs; time limited, volume and free offers and reference pricing, which cites previous prices or recommended retail price to make a particular offer seem more attractive.

"In themselves, there is nothing wrong with these, but if any of these practices are used in a misleading way, consumers can be tricked into buying something or spending more than they would have originally," says James Macbeth, team leader of the project.

Reference pricing is cited as the most common spending practice with customers less inclined to look around for better deals once they have been given a higher valuation of a service or product.

For example, an experiment in the US found that consumers offered a car for $7,272 estimated the true value of the car to be considerably higher when they were also told its original value "was $8,215" compared with when they were told the former price "was $7,414".

Drip pricing, is seen as the pricing practice consumers get most irritated by as one focus group participant summed up: "They should have the extras next to the initial price, they should do that instead of taking you to alternate pages so you forget how much the prices were, then at the end you are bombarded with this massive price."

Commonly associated with the airline industry, drip or partitioned pricing has cost consumers collectively £131 million.

Prashant Vaze, head of fair markets at Consumer Focus says drip pricing is used to advertise cheap headline rates or to get to the top of best buy tables or price comparison sites. He adds: "Nothing frustrates consumers more than seeing the price bumped up by extras such as booking fees and handling charges added at the end of the transaction."

The OFT is now actively seeking out meetings with firms to educate them on what they can and cannot do, to make pricing fairer. If firms do not respond appropriately the regulator warns that it will take enforcement action, which could result in the trader being taken to civil court and facing fines as well as damage to its brand name and reputation.

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