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When Is A Deal A Deal?

Retail Deals

Car sales people use proven tactics to convince you that a car is worth buying. From cost savings to the social rewards of owning a specific model, they know which attributes to highlight to satisfy a customer’s needs. Retail used to work the same way: marketing campaigns convinced customers to purchase products by promoting specific deals, and the sales response could more or less be forecasted. But with the proliferation of new technology such as mobile wallets and online coupons, deals are no longer accessible to the targeted customer, but to all customers. The definition of a deal becomes increasingly grey and fewer customers want to, or expect to, pay the full retail price anymore. If discounts are now the norm, what makes a deal a deal?

The Retailer’s Challenge

Consider the example of a retailer offering gift cards to customers at a discount to their face value. Gift cards are considered to be cash. So, if you see a gift card with a face value of $100, but you can purchase it for $80 from a gift card mall, is this a deal? Will you really be saving $20 upon redemption? Here’s where the nebulous definition of a deal kicks in:

  • How does the retailer and brand owner prove to customers that the gift card had an original value of $100?
  • How can the retailer or brand owner prove to competitors that the gift card is not using false advertising to generate sales?

Whether a product or service, in order to stay on the right side of the law, the brand owner must be able to prove the ordinary selling price of a product. With new technologies and emerging payment methods, this burden of proof can become more of a challenge.

Legislation

Consumer protection laws are enforced in all ten provinces. Gift card expiry dates and fees are banned in these provinces except for cards sold for promotional, charitable, and service specific purposes. As well, to protect consumers, the Competition Bureau requires that the ordinary selling price must be substantiated through either the volume or time test (see below). For sale or bargain prices, the Competition Act prohibits the advertisement of products at a bargain price if the products are not available for sale in enough quantities. This means that a $100 gift card being advertised for $80 must be available for purchase to the advertiser’s best ability, or the advertiser must be able to prove that the $80 gift card’s non-availability is attributed to circumstances beyond his or her control. If the latter happens, the customer should be offered a rain check to purchase the $80 gift card at the bargain price when it becomes available.

With new technologies and the ability of deals to ‘go viral’, it becomes harder for brands to prove that every day products meet one of these tests. As a retailer in the virtual age, how do you ensure your offer meets one of these tests?

Volume Test

To meet the volume test, retailers must be able to prove that 50% or more of the product sales are at or above the ordinary selling price. As we move towards more online products and payments, meeting the volume test becomes more difficult. In traditional retailing, meeting the test was achieved by managing the inventory of product available at the sale price. However, in a virtual world, this can be more difficult. Consumers can shop online anywhere, and they have the ability to easily find the best price. In an instant, a consumer can take advantage of a sale that in the past they may not have found.

When we look at products like gift cards, managing the sale inventory can be difficult. Physical cards are relatively inexpensive to print and generally, stores are loaded with inactive inventory. In fact, for most stores, the regular volume sold is a very small percentage of the inventory available in store. If a retailer plans a promotion based on regular sales, they can quickly find themselves on the wrong side of the volume test. Tech savvy consumers will quickly find and scoop up large volumes of inventory that has been sitting on display.

One way to avoid this is to print special inventory for the sale. Generally, this inventory will highlight both the regular and sale price. The regular price is the ‘cash’ value to the consumer when they redeem the card and the sale price is what they pay today to purchase it. Our experience with cards like this has shown that the retailer needs expertise in inventory management to ensure that the inventory is at the best location to drive your sales. Poor inventory management can put the retailer at risk of being accused of ‘bait and switch’ selling.

For several years, Costco has offered discount gift cards to their members. Retailers selling to Costco try to differentiate the product sold there from product available in the general market. Many dance around the volume test by limiting the number of cards available, calling the cards promotional and adding an expiry or hiding behind the membership requirement to purchase through Costco. However, as more retailers want competitive gift card malls, the pressure to match these offers in the general market place will increase. Retailers will have to become more creative to continue to meet the volume test.

When e-gift cards are added to the mix, balancing cards sold at the ordinary selling price and the sale price becomes more challenging. E-gift cards offer a limitless supply of sale product. With more consumers starting to accept e-cards, it is harder to estimate whether a consumer will switch from a physical card to an e-card in order to get a special price. Limiting the number of e-gift cards sold at the sale price can help retailers to manage to meet the volume test but, you can quickly have a social media nightmare if consumers feel that the number of e-cards available is too low.

Time Test

The time test requires that for 50% or more of the six months prior or after the sale, the product was offered at the ordinary selling price. This time period has some flexibility based on the nature of the product.1 Intuitively, meeting the time test is easier. However, in practice, perhaps not. Retail space is valuable. Good category management requires that retailers continually examine selling space to ensure that they have the most productive mix. You cannot afford to leave a product sitting at an inflated price in an effort to establish the ordinary selling price and you cannot expect other retailers to establish the ordinary selling price of your product in their gift card mall while you discount the product in your stores.

The digital age gives us the ability to change online offerings quickly. With an e-card, there is no need to sell down inventory if a product does not work. You can change the product immediately. But, this means that it is impossible to show a product as being on sale relative to the regular price. Or does it?

If I run a restaurant, my menu may show the regular price of an appetizer as $10, a main as $25 and a dessert as $15. So, I could create a gift card with a $50 value for an appetizer, main and dessert and sell it for $40. My menu would be proof of the ordinary selling price. In theory, this could allow me to offer the deal gift cards in the market all the time as consumers shopping without a gift card would be required to pay the ordinary selling price. However, if the discount cards were offered online as an e-card, any customer could purchase the discount card while having dinner. So, would the ordinary selling price hold up against the time test?

A solution could be to offer the discount gift card for short periods of time or to mix up the discount offer regularly. For example, I could offer my appetizer, mail and dessert card for 3 months, then switch to a discount on 2 appetizers and 2 desserts then switch to something else. Customers who do not want the specific offer would be required to pay full price which would allow the restaurant to meet the time test based on the regular prices on their menu. In this instance, the only way to run afoul of the Competition Act would be to sell a $50 gift card, good on anything for $40 all the time. But, as we have shown, there are other ways to drive trial and create excitement without this kind of discount

The digital age and new payment technologies make staying on the right side of the Competition Act more difficult. As you develop new offers, take the time to ensure that your new product does not get you get into hot water.


To learn more about how we can help your retail business achieve success, visit our retail services page or contact us for further information.