How Outlet Stores Lure Customers Into Buying With ‘Phantom Discounts’

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A class-action lawsuit with backing from the FTC is taking on outlet stores that offer discounts on prices that never existed and other practices described as essentially false advertising.

Buy a pair of boots at an outlet store for $45, when it appears the boots once sold for $180, and you probably think you got a great deal. But what if the $180 price is fake? And the real original price was…..$45?

Would you still buy the boots? Or would you feel cheated?

Diana DaCorta walked into a Bass Outlet store last fall and saw the price tag pictured here. She bought the boots, thinking she’d found a big sale. Instead, she finds herself as the lead plaintiff in lawsuit that seeks class-action status over phantom discounts at outlet stores. She filed suit in March against AM Retail Group, which operates Bass stores.

Screen Shot 2016-04-18 at 11.14.51 AMImage included in DaCosta v AM Retail lawsuit

So-called “phantom discounts” are designed to use a psychological effect known as “framing” to trick consumers into thinking they are getting a steal of a deal. Increasingly, courts and regulators are scrutinizing these kinds of pricing tactics, and you should, too.

“Consumers have a reasonable expectation to an honest marketplace. That’s why we have laws prohibiting deceptive and misleading advertising,” Jeff Carton, DaCorta’s lawyer, tells me. “If a retailer falsely conveys the impression that an item is worth more than it’s being sold for, then consumers are being misled.”

Death of the price tag

A chief concept of Gotcha Capitalism is what I call the “Death of the Price Tag.” Price transparency is critical for the functioning of a market economy, and when prices become opaque or distorted, markets break. Today, many people are confused by the real price of cable television, or an airplane ticket, or a car repair, or even a house. This is not surprising. The death of the price tag means consumers can’t comparison shop, and it means businesses that perfect the art of misleading consumers succeed while businesses with the best products at the best prices fail. That’s Gotcha Capitalism.

As you might imagine, I’m interested in any effort to restore integrity to price tags. One promising trend is a series of regulatory actions and lawsuits around this problem of “comparison” price tags. For years, retailers have tried to convince shoppers that they are getting a steep discount off an “original” price — for example, “$24.99 SALE vs. $79.99 ORIGINAL.” That’s fine, except when the original price never existed. Then it’s an unfair and deceptive trade practice, many courts have recognized. Slowly, retailers are coming around to this notion. You might have noticed, for example, that now includes the odd-sounding “savings not based on actual sales” next to some prices on its site.

Same look, different quality

Outlet stores take this problem a bit further. Since outlets have exploded in popularity, sellers have begun making separate (cheaper) lines of clothing that are sold only in outlets. But unless this is made clear to consumers, many mistakenly believe they are buying items that are equal to goods sold in standard retail stores. That’s also a price tag distortion, because consumers are then led to make incorrect comparisons when trying to make purchase decisions. Regulators and courts are starting to side with this point of view, also. Back in 2014, four members of Congress asked the Federal Trade Commission to investigate the practice.

Since then, Michael Kors paid $5 million to settle a class action lawsuit alleging the practice.

Other lawsuits have followed, including the case filed last month in New York against Bass.

“This action seeks to redress the unfair and deceptive sales practices by which (Bass) is misleading consumers into believing they are receiving steep discounts on certain merchandise sold through its factory outlet stores…,” the lawsuit says. “In reality… the majority of the merchandise sold at its factory outlet stores is manufactured specifically for sale at the outlet, and is never offered at the Comparison price. Accordingly, there is, in fact, no discount whatsoever.”

I tried to get Bass’ point of view for this story, but emails to AM Retail and the firm’s lawyer went unanswered.

In the request for the FTC examination, members of Congress wrote that 85 percent of merchandise sold in outlet stores isn’t what you’d expect — last year’s fashion, or blemished items. Instead, it’s made exclusively for the outlet.

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