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.
Paul Hunt is the president of Pricing Solutions, an international pricing strategy consultancy dedicated to helping clients achieve World Class Pricing competency. Paul publishes a weekly pricing column in the FP Executive. He also writes for the Pricing Solutions Club. Written in partnership with David Schnetzer, Senior Consultant of Pricing Solutions.