Sticker Shock

Pricing errors can result in traumatic losses. Here’s how to respond.

Back Article Feb 1, 2014 By Kristina Shevory

www.istockphoto.com

www.istockphoto.com

One morning last year, Cyberguys, a computer and tech accessories retailer, started getting a lot of calls from customers with the same question. Was the company really selling hard drives for $3?

“Normally, we don’t,” customer service representatives said.

As it turned out, the company’s Amazon storefront was displaying drastically low prices. Computer routers that normally sold for $1,300 were priced at $13. Hard drives worth $300 were going for $3.

Customers loaded their virtual shopping carts with monitors, scanners and satellite phones before the company could fix the error. Cyberguys lost $28,000 in 70 minutes, a “significant” amount for the small, Rancho Cordova-based company, according to CFO Mark Luhdorff. For him and CEO Wes Sumida, there was no doubt what they would do.

“Honor the prices,” Sumida said.

At a brick and mortar store, it doesn’t take long to catch a price mistake. But online, thousands of dollars in sales can be made before a business discovers an error. A company must then decide if it wants to honor the price and lose money or cancel orders and risk angering customers. As more retail sales move online, the decision to honor price errors becomes critical to a business’ bottom line and brand image.

“It comes down to a cost/benefit analysis,” says Luhdorff. “Is it worth alienating or destroying our customer base? No, we have to honor this. Without the customer, the doors are closed.”

While no group tracks online pricing errors, they seem to be occurring more often as retailers open new online storefronts and beef up their websites with hundreds of products and prices. Websites have grown so complex that it becomes easy to introduce price errors, says Kevin Mitchel, president of the Professional Pricing Society in Marietta, Ga.

News of online price glitches spread within minutes. Social media and consumer websites like fatwallet.com and slickdeals.net, which operate forums in which people discuss hot deals, broadcast the errors and magnify a retailer’s sales — and losses.

“What used to be an oops becomes an ouch,” says Matt Johnson, a San Francisco-based managing director at consulting firm Simon-Kucher & Partners.

There are no federal laws governing pricing mistakes, and it’s at the company’s discretion to honor them. The Federal Trade Commission, which protects consumers and guards against deceptive advertising practices, can pursue a company only when fraud or deception is evident. Ultimately, the decision revolves around how a company and its executives view their relationship with customers.

“It’s a very wishy-washy area,” says Edgar Dworsky, founder of ConsumerWorld.com, a consumer resource guide, and a former Massachusetts assistant attorney general in consumer protection. “How much goodwill does the company want to lose by pissing off a customer?”

No company seems immune to price mix-ups. In early November, walmart.com was hit with a technical glitch that both cut and inflated prices by as much as 90 percent.  For nearly a day, Hewlett Packard LCD monitors were selling for around $9, kayaks for $11 and elliptical machines for $33. But a can of Lysol had a price tag of about $100 and Kool-Aid packets were going for $70.

“We’re known for great prices, so some people thought these were legitimate deals,” says Bal Nguyen, a walmart.com spokesman.

Walmart.com, which hadn’t been hit with a price error of this magnitude before, opted not to honor the prices. Instead, it refunded customers and sent them $10 gift cards.

“This might have caused some customers inconvenience, so we gave them gift cards,” Nguyen says. “We wanted to take care of our customers and keep them coming back to the website.”

Most companies that decide not to honor price mistakes miss this critical step, opting instead for an apology letter, issuing refunds before a product ships and citing the terms-of-use clause on its website that states price mistakes can be canceled.

“Customers have a real aversion to loss when it comes to pricing,” says Johnson at Simon-Kucher. “People hate to give something back. It’s important to replace it with something else.”

Coupons and gift cards are good ways to solve a crisis, pricing consultants say, because they are ‘soft dollars’ that can only be spent at the retailer issuing them. Giving customers something in return for the mistake also taps into human psychology.

There are some companies, however, that decide it is cheaper to honor their mistakes than to risk irate customers. Last fall, United Airlines mistakenly gave away tickets for several hours when the ticketing system on its site priced tickets for $0. The airline decided to honor its mistake and won happy customers and press coverage in the process. It did not detail the loss it incurred or the number of tickets sold.

Four years ago, zappos.com, an online clothing retailer, was more forthcoming about its loss when its sister site, 6pm.com, mistakenly capped shoes, bags and clothing at $49.95. In six hours, the company lost $1.6 million selling products far below cost. But the chief executive decided to honor the prices because the company had made the error.

With the potential for a pricing glitch to quickly rack up thousands or millions of dollars in losses, it’s critical for companies to develop a recovery plan. Too many businesses don’t know what to do and often dither, angering customers. A company should have a written plan known by all employees so they can act swiftly to address a mistake.

The plan should list whether a company will honor an error, how it plans to reimburse customers if necessary, and specific inducements, like free shipping or a discount.

Whatever solution the company decides on, it 
should focus on one key element: “Fairness is one of the most effective pricing strategies,” Johnson says.


Kristina Shevory is a freelance reporter who writes regularly for the New York Times. Her stories have also appeared in the Atlantic Monthly, Businessweek, Pacific Standard and Wired. On Twitter at @shevory.
 

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