Price rounding benefits grocers: UBC researcher
Cash customers most likely to lose out
Canadian grocers are making millions of dollars thanks to price rounding on cash transactions, according to an award-winning analysis by UBC undergraduate Christina Cheung.
When the Canadian government eliminated the one-cent coin, a system of penny rounding was implemented to ensure “cash transactions will be rounded in a fair and transparent manner.”
That is not how it has worked out, she discovered.
If every number from zero through nine has an equal chance of being the last digit of an item’s price then prices will round up and down equally and cancel each other out. That’s called zero net benefit.
But that’s not how items are priced, said Cheung, a third-year dual-degree candidate in economics and combined mathematics and statistics.
Previous research and Cheung’s own observations of 18,000 grocery items show that grocers use prices ending in nine 60 per cent of the time and convenience stores 82.5 per cent of the time. That’s a lot of rounding up and her conservative estimate is that Canadian grocers are raking in about $3.27 million a year in penny rounding revenue, what she calls a “rounding tax.”
Before you get your pitchforks and torches out, the net benefit to an average grocery store is about $157 a year.
But the system is ripe for abuse, she learned. By adjusting prices strategically, stores can net up to a five-cent benefit on single-item cash transactions.
“Over thousands of transactions that could be a lot of money,” she said.
In her hypothetical example, shampoo listed at $6.73 in a fiveper-cent tax regime would result in a final price of $7.07, which rounds down to $7.05 and a two-cent loss to the store.
By raising the price by a single penny, to $6.74, the final price with tax comes to $7.08, which rounds up to $7.10. That one-cent price hike nets the store a penny, eliminates a two-cent loss and triggers a two-cent penny-rounding benefit.
Strategic penny rounding prices only benefit the store on single-item cash sales, because buying multiple items makes the last digit of the final price more difficult to predict.
Debit and credit transactions are still calculated to the penny and are not subject to rounding.
“Stores now have an incentive to prices things in a way that maximizes the effects of rounding,” she said. “With the data they have, firms could easily figure out which items are sold individually most often and adjust those prices.”
She also notes that low-income earners are the most likely to pay with cash than high-income earners, suggesting such a pricing approach would affect the poor most significantly.
Cheung submitted her findings for the worldwide Best Undergraduate Paper award presented by the International Atlantic Economic Society and her winning paper is set to be published in the Atlantic Economic Journal.
Major grocers did not respond to inquiries about strategic pricing.