ALEXANDRIA, Va.—Many consumers don’t know why fuel retailers list their gas prices ending in 9/10 of a cent, but there is a long history behind the pricing move, and fuel retailers know there is some subtle marketing strategies with 9/10 of a cent as well.
In the early 20th century, states started to stack taxes on to the sales of gas to build and maintain highways, and back then taxes were levied in tenths of a cent. Gas stations passed the taxes directly on to customers, and with the price of gas around 10 cents a gallon, rounding up to the nearest cent would be a big deal—a 10% markup.
Looking at it from a price strategy point of view, customers are more likely to feel they’re getting a deal if something is set at “just-below pricing” or something ending in 99 cents or 95 cents, according to Robert Schindler, a professor of marketing at the Rutgers School of Business-Camden who researches retail prices and how shoppers process numbers.
"To consumers, a price such as 19.9 cents feels substantially lower than the price of 20 cents," Schindler told CNN.
Tom Kloza, global head of energy analysis for OPIS, told CNN that many station owners want their prices to be a tenth of a cent below an even dollar amount, instead of 9/10 of a cent above.
"A lot of the small station owners will tell you they pick a price by feel," Kloza said. "They'll tell you it makes a big difference if it's $4.999 or $5.009. Drivers don't want to see that $5."
There have been attempts to end the 9/10-of-a-cent method. Iowa made the pricing practice illegal in 1985. "We don't have a one-tenth of a coin," an Iowa state senator reportedly said at the time. "It just bugged me for years." Retailers who violated the law could have faced a $100 fine and a month in jail. However, the law was repealed in 1989.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 of Jim’s Texaco set his price at $2.99 a gallon instead of $2.999 a gallon. He told the San Jose Mercury News that he did it as an experiment—and it cost him. By lopping off the 9/10th of a cent, he saw about $23 less a day in profits based on his 2,500 per day in gallons sold. And no one noticed the difference.
When Jim's Texaco customers were alerted that prices did not feature 0.9 cent pricing, they reacted negatively, assuming that Davis 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.
There also are U.S. convenience stores that have sought to boost transactions by eliminating the penny. In 2016, Mission Market (Fullerton, California) said goodbye to the penny—rounding up or down to the nearest nickel.
Overall, the average fuel retailer today makes about 10-15 cents per gallon selling gas. That 0.9 cent in the price could be about 10% 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.
NACS explains in more detail why gas is priced using fractions of a penny.
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