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Why Gas Is Priced Using Fractions of a Penny
Gas prices that end in 9/10th of a cent are standard practice today. It’s a practice that has its roots in the 1930s.

By NACS Published: 2/22/2017

Tags: Gasoline; Prices


​Gas prices that end in 9/10th of a cent are standard practice today — to such an extent that it’s now common to see the 9/10th pre-printed on gas price signs.

So why do gas prices end in 0.9 cents? It really harkens back to 80 years ago when a one-cent change in the price of gas was a big jump and fuels dispensers had become sophisticated enough to measure out precise volumes. Intense price competition — plus some regulation — has institutionalized the practice to the point where anything other than 0.9 cent pricing is unusual in the United States.

It’s Legal
Pricing to the 1/10th of a cent is legal in the United States — it was part of the original Coinage Act of 1792, which standardized the country’s currency. Among the standards set then was one related to pricing to the 1/1,000th of a dollar (1/10th of a cent), commonly known as a “mill.” A year later, the half-cent coin was introduced, which was minted through 1857.

Mill pricing also was (and remains) common for property tax assessments, stock issuances and power/electricity bills. There are even companies that have instituted the practice. The California-based chain 99 Cents Only Stores prices to the fraction of a cent. In 2008, it increased the price of some of its items to 99.99 cents.

Driven by Competition
It wasn’t until the 1930s that fractional pricing was introduced at the gas pump. A number of factors led to the adoption of the practice. The driving factor was most likely taxes. The first federal gas tax was enacted as part of the Revenue Tax Act of 1932, establishing a federal excise tax on gasoline of 1/10th of a cent. A year later, the tax was increased to 1.5 cents per gallon. This event was likely the trigger in changing retailers’ mindset about how to price. (The current federal tax is 18.4 cents per gallon for gas and 24.4 cents per gallon for diesel fuel).

At the same time, the country was in the midst of the Great Depression. The explosion of automobile sales of the 1920s, and the rapid growth of gas stations to fuel them, increased demand and prices for fuel. Throughout the 1920s, gas prices averaged between 21 to 30 cents per gallon. However, that all changed as the Depression deepened. Demand fell and competition for the customer intensified. By 1930, prices were down to 20 cents per gallon, and they would continue to fall for the next decade. In many areas of the country, gas prices were even lower, sometimes less than 10 cents a gallon.

Because of growing consumer price sensitivity, it was difficult for retailers to adjust their prices in full cents. A one-cent price swing when gas is selling for 10 cents per gallon meant a 10% change.

Meanwhile, fuel dispensers had gotten increasingly sophisticated since they were first invented in the 1880s. By the 1930s, they had advanced to a level where they could dispense fuel to the fraction of a penny.

It’s not clear who was the first retailer to price at a fraction of a cent, but by the mid 1930s the practice was common. By pricing to a fraction of a cent, retailers could more easily adjust prices to lure customers. But pricing to the 1/10th of a cent didn’t mean that the price always ended in 0.9. A historical picture of a Maryville Oil Co. station in Missouri in 1937 shows prices per gallon as 7.9 cents for “white,” 9.5 cents for “bronze” and 11.5 cents for “ethyl.”

Marketing Takes Over
Over time, fuel retailers evolved to pricing at 0.9 cents. The reason is simple marketing. Retail experts have long known that goods prices slightly less than those priced at a whole number sound far less expensive. Something that is priced at $9.99 seems a lot less expensive than something priced at $10. Today, TV infomercials tout products that can be purchased for “four simple payments of $19.99” because it sounds a lot less expensive than $80.

Fuels retailers, many of whom were sophisticated marketers themselves, found that they could increase sales when they dropped their price by 1/10th of a cent when it otherwise would have been priced at a whole number, and soon the practice became commonplace. Infrastructure advances also contributed to the practice of pricing gas at 0.9 cents.

By the late 1950s, the country’s interstate system began to flourish and retailers erected giant price signs along the highways so that drivers could see gas prices as they sped down the road. It became even more common to see retailers price at 0.9 cents because consumers were now price shopping at 60 miles per hour and often only paid attention to the first two digits in the price.

0.9 Cents Becomes the Standard
By the early 1970s, gas prices had reached 40 cents per gallon. Retailers didn’t necessarily need to have price changes in fractions of a cent because a one-cent per gallon adjustment equated to a little more than a 2% change at the pump.

However, President Nixon’s price freezes changed everything. In August 1971, he issued temporary freezes on wages and prices, and he reinstituted these freezes in June 1973. Retailers lost control of their ability to set their own prices at the pump, which were instead calculated by a government-mandated formula that often led to pricing that had other fractional amounts — such as 0.2 or 0.6 cents. Frustrated consumers reacted negatively to these unusual prices and soon the 0.9 cent price was back — by popular demand.

Exceptions to the Rule
Since the 1970s, 0.9 cent pricing for gas has been the rule. But there have been a few exceptions. In 1985, the state of Iowa banned fractional pricing for gasoline. Prices had to be set in full cents. Retailers who violated the law could have faced a $100 fine and a month in jail. The law was repealed in 1989.

A Palo Alto, California, retailer experimented with full-cent pricing in 2006 — and the results were surprising. Jim Davis, the owner of Jim’s Texaco, set his price at $2.99 a gallon instead of $2.999 a gallon. He told San Jose Mercury News that he did it as an experiment — but one that did cost him. Lopping off the 9/10th of a cent meant that he saw about $23 less a day in profits based on his 2,500 per day in gallons sold. And, Davis noted, no one noticed the difference.

Worse, when customers were alerted that prices did not feature 0.9 cent pricing, they reacted negatively, assuming that he rounded up the price. Others questioned why he didn’t reduce the price by more — such as by 99 cents per gallon. Davis quickly abandoned his experiment.

Retailers in Canada, among other countries, have fractional pricing, but while prices are often priced at the 9/10th cent, that’s not always the case. Because fuel is sold in litres, a one-cent adjustment is the equivalent to a 4-cent-per-gallon change, so retailers may elect to price in other increments to lure price-sensitive customers. Prices often end in 0.9, but you may also see 0.4, 0.2 or 0.7. (Interestingly, Canada stopped production of the penny in 2013. All retailers now round the transaction to the nearest nickel for those paying by cash.)

No One Has an Advantage
Overall, the average fuel retailer today makes about 5 cents per gallon selling gas. That 0.9 cent in the price makes up about 20% of a typical store’s profits selling fuel in an incredibly competitive marketplace.

Consumers, meanwhile, get exactly what they pay for at the pump, and the dispensers perform some simple rounding. If the final price ends with a fraction of a cent below 0.5, the price is rounded down. If it is 0.5 cent or above, it is rounded up.

This rounding process at the fuel dispenser is fairly common in retail. For example, at a deli, a consumer may get 0.51 pounds of turkey priced at $6.99 per pound. The price for this purchase is $3.5649, but is rounded down to $3.56. The practice is also in place at all retail establishments that factor in sales taxes. If a local restaurant must include a 7.25% sales tax, the final bill also is rounded up or down based on the required taxes.

 

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