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How Did the Practice of Pricing Fuel with 9/10th of a Penny Get Started? - YouTube
Channel: Today I Found Out
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The practice of pricing fuel with a fraction
of a penny is thought to have started around
[18]
the 1930s.
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While we can't be sure who was the first to
price fuel this way, it seems to have become
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relatively commonplace across the United States
all the sudden around the same time.
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So what happened?
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In short- taxes and the Great Depression.
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The United States Congress first implemented
a $0.01 gas tax in 1932 as a temporary measure,
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putting that money towards reducing deficits
acquired due to the Great Depression.
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The tax was supposed to expire in 1934, but,
as so often happens, Congress voted to extend
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the tax and raise it by half a cent instead.
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The tax now sat at $0.015 per gallon of gas.
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Around this same time, gas station owners
began breaking down the price of a gallon
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of gas by fractions of a cent, leading to
the generally accepted hypothesis that it
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was the fraction of a cent tax that resulted
in gas station owners almost universally beginning
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to price their gas this way.
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While a fraction of a cent is decidedly inconsequential
today, at least as far as an individual consumer
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is concerned, when this practice began, gas
cost around $0.10 per gallon (about $1.75
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today); so the change of the price by even
a fraction of a cent was significant in terms
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of getting people to come to your fuel station
instead of a competitors.
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Rounding up or down by a full cent (which
would be about an 18 cent swing per gallon
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in today's money) also greatly affected the
bottom-line of the particular fuel station.
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Today, federal gas taxes continue to add up
to fractions of a penny.
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For instance, as of the writing of this script,
the federal gas tax is 18.4 cents per gallon
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while the average state gas tax is 33.78 cents
per gallon.
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But given that a difference of a penny per
gallon isn't going to greatly affect the ultimate
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price of refueling your vehicle, you might
be wondering why fuel station owners don't
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simply round up or down on the price of a
gallon of fuel now-a-days.
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As for the rounding down, while it's insignificant
to the individual consumer, that 9/10th of
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a penny per gallon does add up to quite a
bit in the grand scheme of things, which is
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particularly significant as many fuel stations
make very little off the fuel itself, sometimes
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even just a few cents per gallon; most of
their profits come from the convenience store
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side of the business.
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Offering fuel is just a way to get people
in the door.
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As for how much that 9/10th's of a cent per
gallon adds up to, in 2014, the fuel industry
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as a whole in the United States brought home
an additional $1.2 billion with that 9/10th's
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of a penny rather than rounding down to the
nearest cent.
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As to why they don't round up, the answer,
of course, lies in marketing.
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As silly as it seems when you stop and think
about it for a second, that fraction of a
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penny does make a measurable difference in
consumer behavior.
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Pricing gas by the 9/10ths of a cent works
a lot like when other stores sell items for
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prices ending with ".99".
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Shoppers place much greater emphasis on the
first number in a price and tend to ignore
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the least significant digits.
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So a price tag of $4.99 ends up seeming a
lot cheaper than $5.00, even though people
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paying in cash often readily throw away that
one penny they saved.
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As an example of this, Professor Robert Schindler
of Rutgers University in 1996 helped a clothing
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company increase sales by 8% pretty much overnight
simply by changing all their whole dollar
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amount items to ones that ended in 99 cents.
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In yet another case, a study in France recently
noted that when one company lowered the price
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of a pizza from 8 euros to 7.99, sales of
that pizza increased 15% directly thereafter.
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In the same way, when fueling up, customers
only typically pay attention to the first
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three digits of the price.
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A price of $2.29 and 9/10ths gives the individual
the impression that they are only paying $2.29
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per gallon when they are essentially paying
$2.30- two insignificantly different prices
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that nonetheless make a world of difference
when a customer is picking a gas station to
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fuel up at.
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In
the end, each one of those 9/10th of a cent
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per gallon gets tallied up with the ultimate
result often including a fraction of a penny.
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While you might be tempted to think in these
circumstances that the total will always round
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up to the nearest cent, according to the executive
director of the National Conference of Weights
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and Measures, Don Onwiler, this isn't the
case and his inspectors have never come across
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a gas pump that always rounds up.
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As he stated, "The dispensers will always
round to the nearest whole cent...
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In some cases, that means rounding up.
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In some cases, it means rounding down."
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Bonus Fact:
• Fascinatingly, illustrating the power
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of ending a price with "9", Dr. Eric Anderson
of Northwestern University's Kellogg School
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of Management, noted that, "...in our study
involving the women's clothing catalog, we
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were able to increase demand by a third by
raising the price of a dress from $34 to $39.
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By comparison, changing the price from $34
to $44 yielded no difference in demand..."
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As to why exactly this works, it’s generally
theorized that people associate a price ending
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in “9” with items that are on sale.
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Oh monkey brains.
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Will we ever be free of you…
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