What you don’t know about sales can hurt you

'Gigantic Year-End Clearance Sale!' ...

‘Gigantic Year-End Clearance Sale!’

‘Save 40% On All In-Stock Merchandise!’

‘Incredible Bargains!’

Unfortunately, I fall for tactics like these. Like most people, I end up buying stuff I don’t need, don’t like, and would never consider buying at its ‘regular’ price, because I am ‘saving’ money. My garage is full of bargains.

With the failure several years ago of Eaton’s Every-Day-Low-Price policy, consumers confirmed what other Canadian retailers knew: Nothing moves merchandise as quickly as a ‘sale.’ Savings claims are such a powerful marketing tool that they are singled out in the Competition Act for regulation. Sections 74.01(2) and (3) attack the heart of the matter – when and how you can use an ‘ordinary’ price as the basis for a savings claim.

This issue has been contentious for years. Between 1990 and 1998, The Hudson’s Bay Company was involved in a drawn-out battle with the Competition Bureau over The Bay’s sale pricing of mattresses and other items. Shortly thereafter, the Competition Act was amended to clarify, the parties hope, the state of the law.

Under the 1999 amendments to the Act, whether an ‘ordinary price’ claim is lawful depends on a combination of factors. In essence, the test is either a volume or a time test. Has sufficient merchandise been sold at that price to justify the claim that consumers will be saving money? Alternatively, has the merchandise been offered for sale at the ‘ordinary’ price for long enough to justify the savings claim?

The Competition Bureau has issued guidelines regarding the following key provisions for establishing an ‘ordinary’ price: ‘Sold a substantial volume of the product [at that price] within a reasonable period of time’; or ‘Offered the product for sale [at that price] in good faith for a substantial period of time.’

I know the language is dry. But be advised that you need to understand it. These are some of the most important statutory provisions for any retail operation.

The ‘substantial volume’ test will be met if more than 50% of sales within a 12-month period are at or above the ‘ordinary’ price. The ‘substantial time’ test requires that a product be offered in good faith at the ‘ordinary’ price for more than 50% of the time in the six months preceding or following the sale.

There are, of course, exceptions. Manufacturers can use the manufacturer’s suggested retail price (MSRP) as the reference for a savings claim in cases where nobody pays full list price – the majority of car sales for example – provided the savings are a factory rebate or discount and provided the ads clearly state that ‘Dealers may sell for less.’

You can hold a ‘liquidation’ sale, where savings are based on ‘ordinary’ prices that fail both the time and the volume tests, provided you are liquidating the merchandise. (You cannot subsequently offer it at higher prices).

A seasonal product may be sold or offered for sale for a shorter period than other products to establish a regular price.

Products can be introduced at a low ‘introductory price,’ provided the introductory price ‘sale’ does not last for an extended period (that is, more than six weeks).

The guidelines regarding legal sales require a clear understanding of certain principles:

1) ‘Good faith’ means that you genuinely offer products for sale and genuinely expect people to buy them at the regular price. You should offer a wide variety of styles and colours at the ‘regular’ pre-sale price;

2) The term ‘regular price’ refers to the price of sellers generally in the relevant market. If your reference price is, in fact, your regular price, it must be described as such;

3) Price comparisons using the phrase ‘compare at…’ imply that your price is being compared to a competitor’s. Proceed with caution. Ensure that your competitor’s price has been offered for a reasonable time and continues to the date of your sale. Disclose, if possible, the date and source of the competitor’s price: ‘As advertised by our leading competitor in the Nov. 8, 2000 edition of The Toronto Star’;

4) ‘Sales’ must be finite. They should start and end on the dates you advertise. If sales continue too long, they establish a new ‘regular’ price. As a rule of thumb, continuous sales lasting more than 90 days should be avoided;

5) In order to establish a ‘regular’ price, products must be offered at that price for a reasonable length of time – for example, six weeks – before being offered on ‘sale.’ The ‘sale’ should not last any longer than the preceding ‘regular’ price period;

6) Certain promotions and incentives are not considered ‘sale’ price representations: contests; dealer giveaways; low financing rates. However, other incentive programs definitely amount to ‘sales’ claims. For example, a ‘free’ or ‘no charge’ offer implies that the free item is ordinarily available at extra cost. Thus, ‘free’ or ‘no charge’ offers are counted as ‘sales’ claims.

7) Finally, it is critical that you track the number of ‘sale’ days and the number of ‘regular price’ days. Alternatively, depending on your marketing practices, you should track the volume of sales at both ‘regular’ and ‘sale’ prices.

If you have to hire additional staff, so be it. It will be a bargain compared to the legal fees you could face if you fail to pay attention to the rules.

Susan Vogt practises marketing law at the Toronto offices of Gowling, Strathy & Henderson. She can be reached by phone at (416) 862-5439 or by e-mail at vogte@gowlings.com