How Retailers Can Make Strategic “Cents” Out of Disappearing Penny

 The penny is disappearing from some countries' coinage, which will have significant implications for pricing, at least for brick and mortar retailers. The Canadian government officially stopped production of the penny on May 4, 2012, because the cost of manufacturing and distributing this coin was more than it was worth, and will now use a practice called "Swedish Rounding", used mostly in Australia, New Zealand, Denmark, and Norway, by which the total monetary cost of a purchase is rounded (up or down) to the closest unit of physical currency if a customer is paying in cash. (If payment is being tendered using credit card, debit card, or check, no rounding is necessary). Also discussed by Paul Hunt of Pricing Solutions in, Financial Times, "Death of the penny may cause extinction of strategic price point".

 

Similar pricing premises such as Swedish Rounding are  being considered in The Netherlands and China, to name two more. The United States government gets occasional legislation proposed to eliminate the penny, but the main reason is purely economic, for the state which produces the metal used for the coins.

Here's how rounded pricing works:

Say that a dress in a retail storefront costs $39.99, plus 6% tax (or .23994), for a total of $42.39, which, with price rounding would be rounded up to $42.40 if you pay cash in the store. If the final cost were $42.36, those paying cash in the store would pay $42.35. Those paying by check, credit card would be charged the actual amount, or $42.39. Those who will be most affected appear to be customers at brick and mortar establishments, and the establishments themselves, while those who buy and pay online with credit card will experience no difference in final cost.

Implications:

In our recent blog post on the psychology of pricing, 5 Secrets To Online Pricing That Will Maximize Your Sales & Profits, Graham Jones said 7's were better than 9's, 6's better than 7's, etc. etc. etc.  Wiki expounds on the marketing practice based on the theory that certain prices have a psychological impact. The retail prices are often expressed as "odd prices": a little less than a round number, e.g. $19.99 or $2.98. The theory is this drives demand greater than would be expected if the numbers were rounded off, or if consumers were perfectly rational. 

"Americans for Common Cents" want to preserve the penny, concerned that, among other things, with price rounding, merchants would have an incentive to set prices that ensure rounding up on single item cash purchases, while acknowledging that rounding would have a minimal effect on the Consumer Price Index (CPI).

Takeaway:

It's important for retailers to know about developments such as disappearance of the penny and the possible implications regarding pricing and strategic price points. The disappearing penny and price rounding doesn't appear likely to affect online retailers as much as it will affect regular bricks and mortar stores. Remember, with price rounding, payments by debit or credit card pay the exact price, whether online or on-site, i.e., based on the actual final total, your card will be charged the actual price, $10.97, $10.92, or $10.99.  With price rounding, the final price will go up or down depending on the nearest existing coin.   

I'd like to hear what you think about price rounding?  Thanks.  Gilon   

Share this post
Gilon Miller, CMO

About Author

Gilon is a seasoned marketing, sales and business development executive with over 15 years of experience in the software and Internet business. He is the Founder and CEO of GuruShots. Previously, Gilon was the CMO of Upstream Commerce, VP of Marketing at iMDsoft and Director of Global Marketing at SAP. He earned an MBA at the MIT Sloan School of Management and a BS in Electrical Engineering from Tufts University.
Follow us

Comments are closed.