Christophe Vaille is a professional writer, editor, and historian.
While waiting at the gas pump for your tank to fill, have you ever wondered why gas prices end in 9/10 of a cent? After all, most products in the marketplace are priced in whole dollars and cents, so why do gas stations follow a practice of fractional pricing?
In order to understand this seemingly arbitrary custom we must go back to the Coinage Act of 1792 which standardized the nation’s currency. One of the standards established in this act made legal pricing to the 1/1000th of a dollar (1/10th of a cent), which was commonly referred to as a “mill.” Shortly thereafter, a half-cent coin was minted, and remained in circulation until 1857. Mill pricing was implemented for the issuance of stock, property tax assessments, and electricity bills, and remains common in the pricing of these commodities today.
Fractional pricing did not apply to gasoline, however, till the 1930s. The Revenue Act of 1932 instituted an excise tax on gasoline of 1/10th of a cent per gallon. The following year the tax was increased to 1.5 cents per gallon. To most consumers today, this may not seem like a lot of money, but when one considers that throughout the 1920s gas prices ranged from 20-30 cents per gallon, such a tax was indeed significant. With the popularity of the automobile in the 1920s, and the concurrent increase in the demand for gasoline to fuel the new vehicles, the price of gasoline had been on rise. However, with the onset of the Great Depression demand for gasoline began to fall, and competition for customers between gas stations became fierce. By 1930 gas prices had declined to 20 cents per gallon, and would continue to fall throughout the decade to as low as 10 cents a gallon in certain parts of the country.
Due to the dire state of the economy, consumers were keenly sensitive to prices. In turn, this price sensitivity made it difficult for gas stations to increase prices according to market conditions without generating a negative response from customers. Fortunately for gas retailers at the time, gas pump technology had advanced to the point where gas pumps could dispense gas to a fraction of a penny. With the ability to dispense gas in such a precise manner, gas station owners implemented the practice of pricing to a fraction of a cent in an effort to adjust prices without psychologically triggering the customer in a negative way. Initially, the fractional prices varied depending on the station, with 0.5 not being uncommon during the 1930s. As time passed, however, gas stations followed suit with other retailers who had learned that goods priced slightly less than those priced at a whole number ($2.99 versus $3.00), in the minds of the consumer, seemed significantly less, despite the fact that in reality the difference in the two prices was a mere one cent. It didn’t take savvy gas retailers long to realize that they could sell a lot more gas if they reduced their price by 1/10th of a cent rather than listing the per gallon price as a whole number.
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Another reason for the effectiveness of the 9/10 pricing was the fact that most customers viewed gasoline prices while driving past a gas station in their car. The main numbers drivers noticed on the price boards of a station while zooming by in their automobile were the whole numbers, not the fractions. People didn’t factor in the fraction of a cent into their decision to purchase at a particular station or not, so it was logical to price as close to a whole number as possible to maximize profits. Even though you won’t see fractional pricing on your credit card bill for the gas you purchased, the fractional profits do provide significant revenue for the gasoline industry. Studies have shown that Americans purchase approximately 178 million gallons of gasoline per day, which in turn amounts to a half-billion dollars in revenue per year.
While it’s clear to see how a price change in cents could significantly impact consumer demand for gasoline when prices 20 to 30 cents a gallon prevailed, by the time the 1970s rolled around the price of gas had risen to 40 cents per gallon. At 40 cents per gallon, price changes in fractions of a cent were no longer necessary since a one-cent change in price amounted to approximately a 2% difference at the pump—an insignificant amount to most consumers.
The 9/10 pricing as an industry standard came about in the wake of the Nixon administration’s temporary freeze on wages and prices in August of 1971, which were reinstituted again in June 1973. Gas stations no longer were able to price fuel according to their own perceptions of supply, demand, and competition, but were required to price gasoline according to a government mandated formula that resulted in gas being priced in other fractional amounts such as 0.4 to 0.8. which frustrated drivers who were accustomed to 0.9 pricing at the pump. In response to a groundswell of negativity towards the unorthodox pricing, the mandates were lifted and retailers reinstituted the 9/10th pricing which has been our standard ever since.
In the final analysis, no real advantage is gained either by the retailer or the consumer with the 9/10 pricing. On average, the gas station makes approximately 10 cents per gallon on every gallon of gasoline sold. The 0.9 cent in the price accounts for about 10% of a station’s profit in a fuel market that is intensely competitive.
As for the consumer, they receive precisely what they pay for at the pump, and the dispensers automatically perform basic rounding. Should the final price total with a fraction of a cent below 0.5, the price is rounded down. If the total is 0.5 or above, it is rounded up. This rounding procedure is common in retail. An example of this might be at the deli when you are purchasing sliced roast beef for $6.99 per pound. You might receive 0.51 pound of roast beef, but the price is rounded down to $3.56. This practice is also in effect in states that require sales tax. If a store must collect a 7.5% sales tax, the total will be adjusted up or down accordingly via the same method.
So, the next time you find yourself at the gas station gazing up at the electronic price board, remember that the 9/10 pricing, though, seemingly random, has a history stretching back to the earliest days of the automobile, and in the end, works out equitably for both yourself and the owner of your local gas station.