Lesson 2 Business Ethics

 Identify and explain common ethical problems in advertising.  Identify and explain key ethical problems and principles of honest and ethical selling.

 False advertising  Puffery  Bait and switch  Telemarketing  Price gouging  Commission  Straight commission  Code of ethics  Substantiation  Guarantee  Warranty  Testimonial  False prizes

 Advertising – practice of attracting public attention to a product or business for the purpose of increasing sales.  How can people purchase a product if they don’t know about it?  Fine line between encouraging people to purchase a product and manipulating or deceiving people into purchasing a product.

 False Advertising  Puffery  Bait and Switch  Advertising to Children  Telemarketing

 False advertising – practice of making statements about a product that the advertiser knows are not true.  May be about how product works, how it is made, or how it will affect people who buy or use it.  Unethical and dishonest  Public reaction can be severe  Example: Tobacco Industry

 Puffery – term used to describe statements that are not outright lies, but merely exaggerations.  Example: Amusement park claiming to be “the best time you’ll ever have in one day”.  Unethical? Illegal?  Federal Trade Commission (FTC) regulates advertising and advertisers.  FTC allows puffery, defining it as “exaggerations reasonably to be expected of a seller as to the degree of quality of his product, the truth or falsity of which cannot be determined.”

 Bait and switch – the practice of advertising product at a low price while intentionally stocking only a limited number in hopes of luring shoppers to buy more expensive items.  Illegal, but sometimes hard to prove.  No legally mandated minimum number of products that must be kept in stock.  Businesses must do the following:  Clearly state the number of products in stock  Offer rain checks to customers who request them.  Rain check – written guarantee that customers can have the product at the discounted price when more are delivered to the store.

 Vulnerable to deceptive advertising.  Believe claims on TV.  Children have difficulty differentiating between fantasy and reality.  Laws passed to protect children.  Prohibits creators/producers of children’s cartoon from advertising products related to the characters of that program during the broadcast.  Buy Me That

 Telemarketing – practice of selling directly to individuals through unsolicited phone calls, e- mails, or faxes.  Technology has made this practice more common.  Many people feel that telemarketers are wasting their time.  Do not call lists.

American Adverting Federation’s (AAF) Code of Ethics:  Truth  Substantiation  Comparisons  Bait advertising  Guarantees and warranties  Price claims  Testimonials  Taste and decency

 Advertising shall tell the truth, and shall reveal significant facts, the omission of which would mislead the public.  Ethics starts with truth and fairness.  Choosing not reveal important facts about a product is a form of dishonesty.

 Advertising claims shall be substantiated by evidence in possession of the advertiser and advertising agency, prior to making such claims.  Requires more than believing a claim to be true.  Substantiation – the validation of advertising claims with objective data from independent research.  Advertiser must be able to prove all claims are true.

 Advertising shall refrain from making false, misleading, or unsubstantiated statements or claims about a competitor or his/her products or services.  Making false claims about competitors is illegal.  Company may be sued for libel.

 Advertising shall not offer products or services for sale unless such offer constitutes a bona fide effort to sell the advertising products or services and is not a device to switch consumers to other goods, or services, usually higher priced.

 Advertising of guarantees and warranties shall be explicit, with sufficient information to apprise consumers of their principal terms and limitations or, when space or time restrictions preclude such disclosures, the advertisement should clearly reveal where the full text of the guarantee or warranty can be examined before purchase.

 Guarantee – an assurance attesting to the durability or quality of a service or product.  Warranty – written promise to repair or replace a product if it breaks or becomes defective within a specified period of time.  Often explained in small print and complex language.

 Advertising shall avoid price claims which are false or misleading, or saving claims which do not offer provable savings.  Violations are hard to prove.  People fail to notice the small print containing disclaimers to the ad.

 Advertising containing testimonials shall be limited to those of competent witnesses who are reflecting a real and honest opinion or experience.  Testimonial – an endorsement of a product by someone claiming to have benefited from its use.  Feature celebrities or experts  Very effective sales technique

 Advertising shall be free of statements, illustrations or implications which are offensive to good taste and public decency.  How many people must be offended for an ad to be considered offensive?  Pleasing everyone is impossible.  Offending a particular group can have huge consequences for a company.

 For code to be effective, must be enforceable and actually enforced.  Membership in trade groups like the American Advertising Federation (AAF) is voluntary.  Don’t need a license to be an advertiser.

 When income is based on ability to sell products, temptation is greater.  Salesperson may think the ends justify the means.  Most salespeople are honest.  Small number of dishonest salespeople give the profession a negative image.

 The practice of pricing a product far above the normal market value on the basis that consumers have no other way to buy the product.  Example: Gas prices increasing on 9/11 to over $4.00/gallon.  Illegal in most states.  Stores are monitored after disasters.

 Winning a valuable prize such as a car or vacation and then told you must pay a service or delivery charge before you can collect the prize.  Prize doesn’t exist and money disappears.  Loopholes usually explained in small print.  May lure you in with prize to get you to listen to a sales pitch on another product/service.  Too good to be true? Probably is!

 Earning a percentage of the total sales that a person makes.  More you sell, more you earn.  Straight commission – employee doesn’t not get a salary or hourly wage; income is based solely on what they sell.  Motivates people to sell.  Can encourage deceptive and dishonest sales techniques.

 Think long term  Elevate the goal  Change the tactics  Learn to listen

 Majority of unethical business decisions/actions are based on short-term thinking.  Acquiring money immediately which can lead to taking shortcuts/cutting corners.  Often forget about long-term consequences of their actions.

 Goal is to create a mutually beneficial relationship, not just selling a product.  No reason for manipulation or lying.  Act for the customers’ best interests, not making a buck.

 Traditional model of selling  Memorize key points  Present information to customers  Hope the pitch convinces customers  Questions asked of customers lead to a decision to buy  Unsolicited questions are considered distractions  Put yourself in customers’ shoes  Forget the sales pitch! Listen to your customer!