Smart SpendingSmart Spending

Do retailers inflate their discounts?

While it's technically illegal to inflate the original price, state laws allow for lots of wiggle room.

By Karen Datko Dec 6, 2010 1:20PM

This Deal of the Day comes from Kelli B. Grant at partner site SmartMoney.


Ads that tout deep discounts -- 50%, 60%, even 70% off -- have become the norm these days. But some of the companies behind those bold promotions may be doing more than luring bargain hunters: They might be breaking the law.


Several California district attorneys filed a civil lawsuit against last month, claiming that the site deliberately misleads customers about the depth of its discounts. In particular, the lawsuit alleges that the company inflates its reference prices -- the "compare at" or list price that's supposed to tell a shopper how much he or she is saving. The result, they claim, is that consumers may not check for lower prices elsewhere.

Among their examples: a patio set with an alleged reference price of $999, sold for $450, and arrived with a $247 Wal-Mart price tag. president Jonathan Johnson declined to comment on how that particular alleged snafu occurred, citing the pending litigation, but, he said, "It's a rare example." He said the site stands by its policies for calculating compare-to prices (more on that below), and argued that his company has been singled out for what are standard industry practices.


Common practice

Exaggerating original prices has become common for retailers, said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting firm and investment bank based in New York. Big discounts draw shoppers, and there's a distinct advantage to being able to claim a 60% discount when a competitor is offering 40%, he says.

And while it's technically illegal to inflate the original price, specific laws vary by state and allow for a lot of wiggle room, including around what, and how, the seller chooses its reference price.


What's more, catching violators is tough: Customers don't necessarily notice, and sales come and go, which makes enforcement a challenge, said Cheryl Holland Bridges, director of the Center for Retailing Studies at Texas A&M University in College Station, Texas.


For their part, retailers use the fine print in their ads to cover themselves. Whether they refer to a list price, a "compare at" price, suggested price or something else, "They're so all-inclusive as to make it meaningless," says Edgar Dworsky, founder of consumer advocacy site


Ads for J.C. Penney note that items might have been offered, but never sold, at the original price. A spokesman said the disclaimer on the ads was standard, adding, "What we do is above board." At Kohl's, the small type explains that regular or original prices could be "the former or future offered price for the item or a comparable item by Kohl's or another retailer." (The company did not respond to requests for comment.)


Kohl's settled twice with the Kansas Attorney General's Office and the district attorney's office in Sedgwick County (which includes Wichita), which investigated its pricing practices and determined that sale items were often not available at the reference price for a sufficient period of time. Kohl's paid a total of $500,000 in fines but did not admit any wrongdoing.


So how do stores get the reference price on which to base their discounts?, which makes similar reference price disclaimers in its fine print, uses ISBN and UPC codes, when available, to find the manufacturers' suggested prices, Johnson says.


Shopper strategies

In most cases, those are equally meaningless, says Bridges, because companies cannot force retailers to follow their suggestions or they'll be accused of price fixing, she says.


For other items, such as a nonbranded set of 800-thread count Egyptian cotton sheets, the site would confer with its buyers and see what comparable items are selling for elsewhere, Johnson said.


To avoid falling for overblown deals, there are a handful of strategies for shoppers. Ignore the discount and focus instead on how current prices compare with one another, Dworsky says. It's also harder to fudge prices on well-known brands or popular items, like iPads or flat-screen TVs; be more cautious if you're eying a more obscure item, or house brands.


And the Internet can help: Sites like PriceSpider and track how a price or sale compares with previous offers, at that store specifically or across the market. Or, you could just do what Overstock president Johnson does: "Personally, if I'm shopping, I do a Google search," he said.


More from SmartMoney and MSN Money:



Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.


Smart Spending brings you the best money-saving tips from MSN Money and the rest of the Web. Join the conversation on Facebook and follow us on Twitter.