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Drip pricing the greatest threat to consumer understanding, says OFT

Drip pricing, a tactic which adds costs as a buyer goes through a retailer's system, has the most potential to harm consumers according to a pricing strategies investigation conducted by consumer watchdog the Office of Fair Trading (OFT).02 Dec 2010

The next most likely tactic to be harmful is the use of time-limited offers, followed by baiting sales with little sale-stock and complex offers such as mobile phone contracts or gym memberships.

The OFT has promised to crack down on companies which advertise prices which are misleading and therefore in breach of the Consumer Protection from Unfair Trading Regulations. It has published a guide outlining how it will apply the law so that it can take action against companies that do not follow its rules.

"Misleading pricing is not only bad for the consumer, it is also bad for competition, and creates an uneven playing field between fair dealing businesses that stick to the spirit of the law, and those that push the boundaries too far," said John Fingleton, chief executive of the OFT.

"We urge all firms to review their pricing practices and to get their houses in order where necessary," he said.

An OFT statement said companies that did not heed its guidance would "risk enforcement action".

The OFT conducted research into several pricing strategies used in online and offline retail and found that some were potentially harmful to consumers' interests.

"Clear, honest, upfront advertising of prices is beneficial to consumers and competition," said the OFT report (115-page / 830KB PDF). "Misleading advertising of prices, however, may lead to consumers spending more than they need to, buying a product which is not the best for them, wasting time or suffering annoyance, disappointment or regret."

Drip pricing, identified as the most potentially harmful of the practices, involves the addition of charges as a buying or booking progresses. Under drip pricing, additional charges such as taxes, payment card charges or other extras mean that the price paid by the consumer can be far higher than the original quoted price.

The report gives companies guidelines to follow to stay on the right side of the law.

"The OFT is less likely to prioritise enforcement action where a trader includes all compulsory charges in the upfront price [and] where compulsory charges change depending on the options of the consumer, such that they cannot be displayed in a single price, these are flagged with the upfront price," said the guidance.

The study investigated price comparison websites and whether consumers understood how they worked and used them to their advantage. It studied the way in which price comparison sites were used by 1,000 experienced web users and found that they did understand how those businesses worked.

The OFT study looked at whether consumers understood that price comparison sites (PCS) did not compare all vendors; that they were often paid a commission by companies whose goods they sold; that search results were based on a set of assumptions that may not be accurate; and that sellers might add extra charges on to the quoted price.

"Consumers seem to be quite well aware of how PCS are funded," said the study. "A majority held the view that PCS receive a fee from suppliers to feature on their listings and a majority said that they sell advertising space. About a third thought that the PCS received a commission when the consumer purchases a product."

"On balance, it would appear that the consumers in our survey are adopting a relatively savvy approach to the use of PCS that recognises both the advantages of these sites and the disadvantages," it said. "There is a relatively high level of awareness of some of the weaknesses associated with the price comparison business model and we would expect this to assist consumers in protecting themselves from any potential harm that may arise."

The OFT said that retailers were less likely to be hit with enforcement action if they followed the Pricing Practices Guide produced by the Department for Business, Innovation and Skills (BIS) and the Advertising Standards Authority (ASA)'s Code on Advertising Practices.

"Following publication of this report we will look to see whether there appears to be significant movement in the areas where we have identified the highest potential for consumer harm and, working with our enforcement partners, take targeted follow up enforcement action if necessary," said the OFT report.