

Death of the penny may cause extinction of strategic price point

More from Paul Hunt

The loss of the penny will have significant implications for pricing.

On May 4th the Canadian government officially stopped production of the penny, ironically it is not of sufficient value to justify its price. Indeed, the penny used to have 20 times more purchasing power than it had when it was first produced on January 2, 1908.

However, “making cents hasn’t made sense for a long time”, according to one parliamentarian, and in fact it now costs around 1.5 cents to make a penny and as much as three cents to distribute. So, how will we now cope with the penny’s inevitable disappearance?

We will now be using Swedish rounding. It involves rounding  the basic cost of a purchase which is to be paid for in cash to the nearest multiple of the smallest denomination of currency. The term “Swedish rounding” is used mostly in Australia, where such a method has been practiced since the 1990s. For example, let’s say a cup of coffee in Toronto currently costs $1.60 and is subject to 5% GST. A consumer today would pay $1.68 for that drink. Once the Swedish rounding is implemented, that price would be rounded up to $1.70.

Nevertheless, it can work both ways. A lunch in Calgary that costs $4.87 would be rounded down to $4.85. That is, unless you pay by debit or credit card in which case the charge will remain exactly $4.87.

So what does all this imply?

There may be significant implications for pricing, after all a 1% improvement in price leads to a 12.5% improvement in corporate profitability for the average company. So “watching the pennies” can make the difference when it comes to capturing that 12.5% improvement.

For example, in Australia they removed the penny about 20 years ago and the impact was that .99 prices migrated to .95. Over the years I have trained many retailers to do just the opposite and move their .95 price points to .99. The feedback has been consistent; they made more money when they did so.

The value of the .99 price point is well documented.  For example, French researchers found that lowering the price of a pizza from 8.00 Euros to 7.99 boosted sales 15%. Robert Schindler, professor of marketing at Rutgers Business School in the U.S., has published several papers on the “99 effect”. He expresses it slightly differently, observing that people overweigh the left hand number:

“When a price changes from $30 to $29.99, the change from three to two makes more of a difference than the value of that money could predict,” he opines. “It is like when a 39-year-old turns 40, the birthday feels like a big deal. Or when 1999 ends and 2000 starts, it feels like an emotional difference.”

My advice is to stay with 99-cent pricing and see how consumers react. If they feel you are “nickel and diming” them you may be better off moving to 95 cents, but if that’s not the case you are better off at the .99 price in the long run, pennies or not.

Those are my two cents on this issue.


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