Claims Expressing Pricing as a Function of the Advertiser's or Competitor's Price or Cost
In July 1996, the Local Advertising Review Program (LARP), a joint program of the Cleveland Advertising Association and the Better Business Bureau, convened a panel to discuss concerns regarding the use of claims such as "AT OR BELOW COST," "AT WHOLESALE," "WHOLESALE PRICES" or "WHY PAY RETAIL?" in retail advertising. The panel members included advertising professionals, retail advertisers, and public representatives.
In the interest of maintaining ethical advertising practices, the panel recommends that common usage and understanding govern the advertiser's use of such terms as "cost," "wholesale," "invoice" or any other claims which express an advertiser's pricing as a function of the price paid by, or cost of, the advertiser or other merchants.
The use of claims using such terms may carry a heavy substantiation burden, but the advertiser choosing to use those claims should nonetheless be capable of this proof.
Common usage of these terms would yield the following reasonable definitions:
- A "wholesale" supplier is one that sells in a large quantity to those who intend to resell the merchandise for a profit; and a "retail" supplier is one that sells in small quantity direct to the consumer.
- A "wholesale price" is the price paid to a supplier by one intending to resell the item for a profit, or (in a broader context) can be an expression of the prices paid by a significant group of representative retailers in the area.
- "Cost" is the price paid for goods. (The term, when used in advertising, is rarely perceived by its target audience in its strictly commercial context of including all other expenses associated with a sale, such as overhead, commissions, etc.)
- "Retail prices" are the prevailing prices currently charged by a significant number of representative retail outlets in the local marketplace.
It follows that by interpreting these phrases to have their common meanings:
- A retail outlet cannot sell "at wholesale." And while a retailer can offer merchandise "at wholesale prices," it must be able to show that the price being charged is either the actual price paid by the retailer, or prevailing prices paid by representative retail outlets in the marketplace.
- An advertiser that claims or implies it is selling merchandise at "less than retail" is representing that its merchandise is priced significantly below prevailing prices at representative retail outlets in the local marketplace, and has the burden of proving that assertion.
A consumer must not be required to know the subtleties of the advertiser's business in order to reasonably understand the claim. A published report or index should not be used in a way that could mislead consumers as to its significance (such as a comparison of one's prices to a "wholesale" price report that tracks the highest price paid at wholesale for various items). As another example, when advertising the sale of goods at "invoice," "cost," or "wholesale price" (which a consumer could reasonably assume to be the actual price paid by the retailer), the existence of any later incentives/rebates should be disclosed.
In any such claim, the basis of any comparison (whether to one's own prices, a competitor's, etc.) should be clear. Any limitations whatsoever (as to which merchandise the claims apply, e.g.) should also be conspicuously disclosed.