Why Do Gas Prices Have Three Decimals?
January 9th, 2007 | by Brian Carr |Have you ever wondered why the price of a gallon of gasoline typically goes out to three decimals? It seems like we’ve just sort of accepted is as a regular occurence, however it seems to be the only regularly purchased item that warrants an extra tenth of a cent.
There seems to be two theories as to why gasoline companies use this strategy; pricing psychology and an extra way to rip off consumers. While I certainly believe that there’s some pricing strategy involved, I’m not quite willing to throw my support behind those who feel it’s an extra way to rip off consumers.
I think the psychological aspect is pretty self-explanatory. Since we’ve been trained to see prices out to two decimals, gas companies seems to be willing to take advantage of the fact that we’re willing to pay an extra $.009 for each gallon of gas. For example, when a gallon of gas is advertised at $2.359 we say, “gas is $2.35 today,” not “gas is $2.359 today.”
Another interesting theory comes from an article on TheTaoofMakingMoney.com which states that gas stations use the extra $.001 to skimp people out of change. The article’s theory states that gas stations keep the extra $.001 for every gallon of gas because they are unable to provide that amount in change, and ultimately end up pocketing an extra $300,000 each year. Considering the billions of dollars these gas companies make each year that $300k doesn’t seem like much, but every little bit counts.
Because I thought that the idea seemed a bit far fetched I decided to test it out myself. Here are the numbers I came up with when I ran some figures in a simple Excel spreadsheet based on a $2.319 price of a gallon of gas:
| Gallons |
Actual Price |
Amount Paid |
| 1 | 2.319 | 2.32 |
| 2 | 4.638 | 4.64 |
| 3 | 6.957 | 6.96 |
| 4 | 9.276 | 9.28 |
| 5 | 11.595 | 11.60 |
| 6 | 13.914 | 13.91 |
| 7 | 16.233 | 16.23 |
| 8 | 18.552 | 18.55 |
| 9 | 20.871 | 20.87 |
| 10 | 23.190 | 23.19 |
| 11 | 25.509 | 25.51 |
| 12 | 27.828 | 27.83 |
| 13 | 30.147 | 30.15 |
| 14 | 32.466 | 32.47 |
| 15 | 34.785 | 34.79 |
| 16 | 37.104 | 37.10 |
| 17 | 39.423 | 39.42 |
| 18 | 41.742 | 41.74 |
| 19 | 44.061 | 44.06 |
| 20 | 46.380 | 46.38 |
If you look at the numbers closely, you’ll see that it appears you’re getting ripped off of a small amount of change when you buy between one and five gallons of gas. However, it appears like you’re on the winning end of the deal when you buy between six and ten gallons of gas.
Seems to me like it all ends up being a wash. I don’t know if this debunks TheTaoOfMakingMoney.com’s theory, but I think it makes a valid counter point.
Either way, considering we’re willing to pay $3 or more for a gallon of gas (and possibly even higher this summer) in the grand scheme of things paying an extra $.001 for each gallon probably isn’t going to break the bank.
6 Responses to “Why Do Gas Prices Have Three Decimals?”
By Golbguru on Jan 9, 2007 | Reply
Thanks for mentioning my article and appreciate the efforts you took to verify a few things. People should always question whenever a theory is raised…helps to refine the topic
I quick note though, I know Excel rounds it off scientifically as in, 2.55 will be 2.6, and 2.54 will 2.5…etc., but I am not sure the gas stations do it that way. So the real check will be to fill in those incremental gallons of fuel (without anyone noticing that you are up to something ) and then check the numbers.
Also, I am ok with the rounding and stuff…and I don’t mind if someone rips me off for $0.001…my issue is just with the $0.001 display (no body else except gas stations do that)…I mean what kind of a currency unit is that.
You will be surprised to know that, after this article got on Digg.com…there were like 122 comments, and every one of them giving a different answer ..looks like no one knows what really happens.
By Brian Carr on Jan 9, 2007 | Reply
Not a problem - I enjoyed what you had to say and I think that you do prove a valid point.
When I put together my Excel spreadsheet I specifically used the round function (obviously to two decimal places) but that was under the assumption that gas stations do the same thing.
If they don’t, then it appears that the stations are getting between .001 and .009 extra cents for each gallon of gas.
You take that .009 and apply it to the 300,000,000 gallons of gasoline pumped in the US and you’re talking about getting ripped off of $2.7 million.
While that’s certainly not much in comparison to the tons of money these companies are raking in, I’d still take back my portion of it!
By XessQ on Jan 19, 2007 | Reply
“For example, when a gallon of gas is advertised at $2.359 we say, “gas is $2.35 today,” not “gas is $2.359 today.”
# GAL you think you pay
pumped $2.35 $2.359
1 gal 2.35 2.36
2 gal 4.70 4.72
3 gal 7.05 7.08
5 gal 11.75 11.80
10 gal 23.50 23.59
20 gal 47.00 47.18
so if your vehicle averages 23 MPG and in the course of the year you drive 18500 miles a year you consume 804.35 gallons of fuel and at the “2.35″ per gallon you think you would spend $1890.22 but you really are spending $1897.46 and thats how they make the money.
By Brian Carr on Jan 19, 2007 | Reply
XessQ - Good idea, but I think your argument is off.
The gasoline companies don’t make profit based on what you “think” you’re going to pay. If I think I’m going to pay $5 for a tank of gas but it ultimately ends up costing $15, it’s not like the gas company gets $10 in profit.
By Diane Henriksen on May 19, 2008 | Reply
I think it’s either a big waste of a decimal space ( how much money is spent on having that extra digit display?), or a function of the fact that the pumps aren’t all that accurate - can they really give us exactly 1 gallon no more no less? So it would seem that the more gas you pump, the more accurate the price is. But does it really matter? The price of gas is outrageous no matter how you figure it.