Gas prices that end in 9/10 of a cent are standard practice today, to such an extent that it’s now common to see the 9/10 pre-printed on gas price signs.
ALEXANDRIA, Va. – Why do gas prices end in 0.9 cents? It 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.
“Why Gas Is Priced Using Fractions of a Penny” was released today as part of the 2017 NACS Fuels Resource Center, which examines conditions and trends that could impact gasoline prices. The online resource is annually published to help demystify the retail fueling industry by exploring, among other topics, how fuel is sold, how prices affect consumer sentiment, why prices historically increase in the spring and which new fuels are likely to gain traction in the marketplace.
Pricing to the 1/10 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 1/1,000 of a dollar (1/10 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. But it wasn’t until the 1930s that fractional pricing was introduced at the gas pump. The first federal gas tax was enacted as part of the Revenue Tax Act of 1932, establishing a federal excise tax on gasoline of 1/10 of a cent. A year later, the tax was increased to 1.5 cents per gallon. This event was likely the trigger in the changing retailer mindset about how to price.
Over time, fuel retailers evolved to pricing at 0.9 cents. The reason is simple marketing. Retail experts have long known that something that is priced at $9.99 seems a lot less expensive than something priced at $10, for example. 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.
Retailers in Canada, among other countries, have fractional pricing; but because fuel is sold in liters, 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.)
“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 cents or above, it is rounded up,” said NACS Vice President of Strategic Industry Initiatives Jeff Lenard.