I found myself driving down the road tonight explaining to my son that when you see a price for gasoline that says something like $1.89 that this is really just a hair short of $1.90 since the real price is 1 dollar and 89 and 9/10ths of a cent. I lived my life looking at that always taking it for granted and never really wondering about it.
But what a bizarre pricing norm. I’m just wondering if anyone knows the origins of this. Nothing I can think of makes any sense because all of the logics should apply to any other product as well but gasoline is the only one that I know of that is sold this way.
What about when gasoline was 5 cents a gallon?
I remember those days, but it was still .05 9/10. I don’t remember who came up with it but I am sure it is to get another buck out of us.
Found this interesting tidbit on
http://www.users.qwest.net/~taaaz/AZgas.html#A%20LITTLE%20HISTORY
Exactly when and where the tenth cent pricing practice was first used to set the cost of a gallon of gasoline has been difficult to determine. Requests for information on this subject addressed to the major oil companies and to the many petroleum marketing associations, with one exception, were not helpful. A response from the Customer Relations Department of Mobil Oil Corporation suggested that tenth cent pricing probably started no earlier than the late 1920s and early 1930s.
It’s a marketing ploy…When oil companies started selling their product with a price sign, that extra 9/10 cent made a difference. Even today, with gas at $1.75 or whatever, motorists will drive for MILES looking for the cheapest station. $1.72 or $1.76, a meaningless percentage, but important to Joe Sixpack…
The companies who make the pump computers, at the time crude mechanical contraptions, enjoyed an advantage by adding that third digit that allowed tenths of a cent pricing. “Our pumps pay for themselves”…
The only industry that advertises its prices for all to see and compare, and people are complaining? Jeeesh!
Have you ever noticed that rather than charge $20, a retailer will charge $19.99? It is the same principle. In effect, a gallon of gas that could cost $2 gets a price of $1.999. Most people see the sign and say “gas is less than $2 a gallon.” If other retailers could get away with charging you an extra $.009 per unit, they would do it too.
I heard the story once but don’t remember it anymore. It wasn’t all that interesting. I’d just be a little careful of making a big deal out of it with a kid and driving them nuts with this kind of thing.
As told by Paul Harvey, so take that for what it is, he claims it all started with the Chicago Tribune. They sold the papers for 1 cent but back then no one had pennies in their pocket. So he came up with the idea of convincing stores to lower their prices by 1 cent so that everyone would have a penney in their pockets to buy a paper. Supposedly had to import barrels of pennies from the mint in order to meet the demand.
I have no reason not to believe the story. In business school we really never spent much time on this kind of pricing scheme and the general view is you’d have to be pretty simple minded to actually have it impact a purchase. Who really would choose to buy something for 19.99 but not 20. Just doesn’t make sense but it seemed to catch on with business people looking for some kind of a scheme.
Clarification: The Paul Harvey report dealt with retail prices in Chicago not fuel prices.
You can Google the 9/10ths gallon thing for fuel and get a lot of reading material if you have nothing to do. Sounds like it started way back in the 30’s but bottom line is nobody knows for sure why. Most plausible to me is that back when it was 8 cents a gallon, the percentage increase to go to 9 cents was too great so fractionalized it.
The story I’ve always heard about the .99 cent prices is that major department stores did that so the clerks would have to open the cash registers to make change and so the clerks wouldn’t be able to just pocket the money.
I have been driving for 60 years but don’t remember when the 9/10 cent began However, during WW11 America used Mills (1/10 of a cent) 1 mill was a red plastic coin and 5 mills was green. (I guess that was the first use of plastic for money) I wish I had some of them now, so I could pay for my gas with them.
Frankly it is time to get rid of the penny. Back in 1917 as I recall they eliminate the half penny and at that time it was wroth about 17 cents in today’s value. It is just silly to bother with them. Even better would be to get rid of nickels and quarters as well adding 20? and a new smaller 50? coin. Does anyone really enjoy having to make change based on a penny? We might even save a little as the $9.99 price tag will become $9.90.
Wow! You Can Recall Things From 1917? (Just Joking.)
"Back in 1917 as I recall … "
I like the penny. It sort of help makes people more aware of inflation. Eliminate the penny and next will be the nickel, then the dime, then the quarter, then the dollar, then …
“Does anyone really enjoy having to make change based on a penny? We might even save a little as the $9.99 price tag will become $9.90.”
I’m thinking that the price would go to $10.00 or maybe $10.90 (If you like the “point 9” stuff). It won’t go down.
You could be spot on about dropping some denominations, though. With all this money the Feds are printing, runaway inflation is about to begin. Get your wheelbarrow ready!
It’s The Meter! They Do It Because They Can!
Cigroller states, “Nothing I can think of makes any sense because all of the logics should apply to any other product as well but gasoline is the only one that I know of that is sold this way.”
I pay $1.479/CCF for natuaral gas. I pay $0.05659000/KWH for electricity. That’s two other things. I think they do this because they can. All of these products have something in common (besides energy). They are “metered” when sold. It’s the meter.
I did notice that on a recent gas fill-up in my car, I saved a penny because the total was actually calculated using $2.389 (compared with $2.40). A penny saved is a penny earned.
It seems to me that anything sold as an analog quantity is metered and sold in fractional cents whereas discrete quantities are sold in whole cents.
There was a comedian who once joked about the need for a 99c coin. Funny at first until you think about how most things are also taxed.
If a gas station charges you 9/10 of a cent per gallon, they have to round up when you pay. So you end up paying more than advertised.
$1.999/gal. X 12.012 gal. = $24.012
You pay $24.02 (an extra $0.008). That doesn’t sound like much, but how many times do you buy fuel in a lifetime? How many customers to they serve each day? It adds up, and the gas stations end up charging more than the advertised price.
If you do away with pennies, you will end up paying more for gas if you pay cash.
Why round up? In the example above, I think you’d round off, pay $24.01. Same thing happens when you pay for anything with sales tax, the price is rounded to the nearest cent. This isn’t an issue about gas prices.
Why round up?
Because they can. Who is going to argue over 8/10 of a cent? Who would even notice that they were overcharged less than a penny?
Sales tax is already built into the advertised price of fuel, so a gas station could round up all the time and make even more money on the tax revenue that gets rounded down. Who would notice?
I could deal with the “metered” measures and fractional cents thing - but unlike, e.g. electricity I’ve never seen gas at something like 1.756713 - or something. The .9 fraction seems to always be the fraction. The “1.99 looks like less than 2.00” also doesn’t satisfy as I should then be paying 1.999 for Q-tips rather than 1.99.
Bing may be right that the historical reasons are just not that interesting. Sometimes things like that are. But this logic:
"In business school we really never spent much time on this kind of pricing scheme and the general view is you’d have to be pretty simple minded to actually have it impact a purchase.
doesn’t work since it should apply to both sellers and buyers. I.e. everyone in the petrol industry making pricing decisions and such are simple minded too. In my experience with “business school” types they always think that decision makers in business are brilliant while it is the consumers who are simple minded. This logic makes both simple minded.
I don’t know why the “$1.99 instead of $2.00” works, but it does work. Calling consumers simple-minded doesn’t adequately explain it. I can’t wrap my head around the reasons either, but that doesn’t change the fact that it works.
There is evidence (marketing research) that proves changing the price from $20 to $19.99 leads to more units sold. Marketing professionals probably don’t care why it works. They only care whether or not it works. So I doubt research has been conducted to find the reasons it works.
These pricing decisions are not based on simplistic reasoning. They are based on market research. They survey target customers to find out which price points encourage them to buy the product. They find what works and they go with it. The same goes for the other three Ps of marketing (package, place, and promotion). You may as well ask “Why does one type of package seem to sell more than the others?” Nobody really cares why. They only care that it works.
Trust me, if your drug store or grocery store could get away with charging $1.999 for Q-tips, they would do it. I think the main difference between gasoline and Q-tips (in terms of pricing) is that whole gallons of gas are not packaged for sale, and when is the last time you bought 1.625 boxes of Q-tips?