Why gas prices always end in 9/10 of a cent

By Nathaniel Meyersohn, CNN Business

As gas prices continue to rise, drivers are angrily glaring up at pump price boards each time they fill up their tanks.

The average national price Tuesday was a little under $5.02 per gallon, according to AAA. Prices are even higher in some states. California had the nation’s highest average price of $6.44 a gallon.

But why does the price of a gallon of gas always end in 9/10 of a cent on stations’ price boards? No other retailers advertise their prices in fractions of a cent. Pennies are so worthless these days that people even throw them away or leave them on checkout counters rather than keep them in their pockets.

It may seem unusual, or even unnecessary, but there is a long history — and a subtle marketing strategy — behind gas prices ending in 9/10 of a cent.

Fractional prices first appeared in the early 20th century as states began implementing sales taxes on gas to help build and maintain highways.

At the time, the taxes were levied in tenths of a cent and gas stations passed them on directly to drivers, said Ed Jacobson, a former gas station owner who now runs the Northwoods Petroleum Museum in Three Lakes, Wisconsin.

But why not just charge a full cent? Well, at that time, the average cost of gas was around 10 cents a gallon. So adding a cent was a big deal, especially for drivers strapped for cash during the Great Depression. Instead of rounding up, which would have equated to a 10% increase, gas stations added the fraction of a cent instead.

By the 1950s, as the interstate highway system developed and gas stations began advertising their prices on big boards, most stations had moved to ending prices in 9/10 of cent, rather than a smaller fraction. This was a way to maximize sales, said Jacobson.

They’re “squeezing the buck as far as they can,” he said.

Setting prices ending in 99 cents, known as “just-below pricing,” is a common marketing tool used to make consumers feel like they’re getting a deal, said 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 said.

Gas station owners now have computer programs that can help them set prices, said Tom Kloza, global head of energy analysis for OPIS, which tracks gas prices at 130,000 stations nationwide.

Many station owners would prefer their prices to be just a tenth of a cent below an even dollar amount, instead 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.”

Although AAA’s national average price is now above $5 a gallon for the first time on record, the most common price for a gallon of regular gas is still at $4.999, according to OPIS data.

There have been occasional attempts to end fractional pricing for gas.

In 1985, Iowa outlawed the practice. “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.” In 1989, however, the state repealed the law and most stations returned to fractional pricing.

In 2006, Jim Davis, a gas station owner in Palo Alto, California, dropped the fraction of a penny and rounded his prices down. He said it cost him around $23 a day.

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CNN Business’ Chris Isidore contributed to this article.