Author: Rafi Mohammed

The media has recently been scrutinizing “misleading retail reference prices,” or the practice of promoting prices as “sales” or “ discounts” when the list prices are actually inflated above suggested retail prices. In this article, the author explores common retail pricing strategies used and the potential ramifications of price misinformation. Rafi Mohammed is the founder of Culture of Profit LLC, and author of The 1% Windfall: How Successful Companies Use Profit to Profit and Grow. He can be reached at This article originally appeared on the Harvard Business Review web site at

The Pricing Advisor, April 2016

The New York Times recently detailed the prevalence of misleading retail reference prices — a term I use to include list price, original price, manufacturers’ suggested retail price, etc. As reporter David Streitfeld noted, a check at various sellers for a Le Creuset skillet found reference prices ranging between $250 and $285 — but most retailers (including Le Creuset’s own site) actually sell the skillet for $200. It’s an example of why reference prices have little true informational value to consumers.

In theory, sellers should be able to set whatever reference price they please. A list, original, or suggested retail price makes no pledge to represent the fair market value. Viewed in the most positive light on the selling side, these are aspirational prices around which the seller hopes to make sales.

The reality is trickier. It’s common in the retail industry to show a reference price and a much lower “our price.” The only reason to show this comparison — the intent — is to convince consumers that they are getting a good deal. This comparison is only meaningful when a reference price reflects the true market value. It’s misleading to purposefully inflate a reference price to trick consumers into believing they are getting a bargain.

The ubiquitous use of the “reference compared to our low price” strategy highlights a key consumer challenge: it’s difficult to value a product or service. Determining whether a price is a good deal is time consuming. It involves researching prices at other retailers as well as comparing the attributes/prices of rival products. Consumers use reference prices as a shortcut — an anchor to evaluate a current selling price.

It’s fair to question what responsibility consumers hold in their purchase decisions. After all, if we believe reference prices can’t be trusted, as many of us do, what’s the big deal?

The fact that sellers regularly use the reference/our price strategy suggests that even if consumers claim they know reference prices are suspect, the strategy is effective in swaying consumer purchases. Why else would retailers show comparisons? J.C. Penney’s failed attempt to wean customers off of puffed-up discounts provides further evidence. Ditching its longstanding practice of holding frequent sales that provided big markdowns from inflated reference prices, the department store chain moved to an everyday low pricing strategy in 2012. After revenue dropped by 25% in the first year of using everyday low prices, Penney fired its CEO and reverted back to boosting reference prices and the non-stop cycle of discounts. Even though J.C. Penney’s strategy shift unabashedly told us that reference prices are exaggerated, its reversion suggested consumers remain more willing to buy from retailers who engage in the charade.

Consumers always have the option to search various websites and stores to determine whether a given price is a good deal. This is burdensome to do for every purchase. Some price comparisons are honest — genuine sales or closeouts, forexample. The full value of these true discounts, however, is lost amid the noise of our cynicism on the veracity of reference prices. Trustworthy price comparisons will make shopping much easier. They are akin to listing calorie counts of items at fast food restaurants — helpful to consider when making a purchase.

Are You Really Getting a Discount, or Is It Just a Pricing Trick?

So what should be done? When reference prices are used as a comparison to a current price, efforts need to be taken to ensure the contrast is valid for consumers. The Federal Trade Commission has regulations on the books, but they haven’t been enforced rigorously. A straightforward fix is to require retailers to provide additional information on the price tag. The most recent date, for instance, that the higher reference price was the actual selling price for a reasonable time period — two or more weeks — should be noted. Alternatively, simply specify the lowest price the product has ever sold for at the retailer. This information helps customers understand and make their own decisions on how to interpret reference prices.

Caveat emptor and “everyone knows reference prices are embellished” are dubious reasons to continue justifying questionable price comparisons. The fact that it’s a common practice shouldn’t provide carte blanche for sellers to abandon integrity. Requiring additional information on price tags can make price comparisons meaningful to consumers and, as a result, make the buying process more efficient.

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