Eliminating the Penny

The Penny is one of the most useless items we have in America right now.  Most stores have a jar at the cash register where you can place pennies that you get as change so that other customers can use them so they don’t have to break a larger currency and deal with these useless coins.  I think I have a solution to not only make the penny obsolete but provide a way to stimulate the economy in a small but meaningful way. 

Before I get to the details of my plan, let’s review Salami Slice theory and those of you who have seen Superman III and Office Space know what I’m talking about here.  The plot for Superman III centered on a computer whiz who figured out a way to track the fractions of a penny that are truncated in various bank transactions and funnel that money to a personal account.  I am going to take this a step further and propose a scenario where all retail outlets in the US (big box retail outlets, grocery stores, fast food stores, electronics warehouses, sporting goods stores and every small business in the US) employ a system to round UP to the nearest whole nickel of the final purchases.

As an example – If the initial total (including sales tax) was $24.57 then the rounded total would be $24.60 and if the initial total was $10.01 then the rounded total would be $10.05. 

The extra pennies a day each individual consumer would spend would be trivial but imagine what that extra amount would mean for the businesses over a year’s time when all the transactions are added up.  The software changes to the point of sale computers would be a trivial change so in the following analyses I’ll ignore the labor and cost associated with those changes.  In larger stores, such as Wal-Mart, I’ll concede that the changes will be more cumbersome but they have the bandwidth to absorb this work and as you’ll see, it’ll pay for itself real quick.

Before I go through the detailed calculations, I’d like to review two key assumptions.  First – Each initial total can end in a digit from 0 to 9 and if it ends in 0 or 5 there is no need to round up so we can assume that 80% of the transactions (8 of the possible 10 digits) will end in a number that is not 0 or 5.  Second – For totals not ending in 0 or 5 the amount to be rounded up ranges from $0.01 (it the total ended in 4 or 9) to $0.04 (if the total ended in 1 or 6) so the average amount rounded up will be $0.025.

Now let’s see the results that various businesses would see from this type of transaction modification.

McDonalds

From the following link, we see that McDonalds serves 60 million customers worldwide and I’ll make the assumption that there are 3 eating customers per paying customer and that 33% of all worldwide customers are in the US.  I do not have a source for this but I think this is a conservative estimate so indulge me as I perform the calculated yearly profit that McDonalds will see from this transaction change.  As you can see from the calculations below, McDonalds would see a yearly additional profit of $48.18 million and that money could go to share holders, opening new stores, hiring new workers or increasing salaries of existing workers.  

Wal-Mart

From the following link, we see that every day Wal-Mart serves 200 million customers worldwide.  They have 9,884 stores worldwide but only 4,518 are in the US so 46% of the 200 million are served daily at a US Wal-Mart.  Unlike McDonalds, the customers served number that Wal-Mart reports is indicative of an actual transaction so doing the math which is shown below reveals that Wal-Mart will add over $667 million to their bottom line if this new transaction system were instituted.

Small Businesses in a Mall

From the following link showing shopper statistics for the mall in Stamford Connecticut (population around 1 million) I’ll get an approximation for what a small business in an urban setting would see from this new transaction system.   I took the average visits per month to the mall and normalized this to how many purchases would be made in each of the 100 stores in the mall based on the data that shows each visitor shops in 2.4 stores and makes a purchase in 63% of the stores they enter.  Granted this is an average and the ‘big box’ stores would see more than the smaller stores but the following calculations show that the average store in a large urban mall would see an additional $77,475 of profit using this new transaction system.

Typical Small Businesses

The data for a typical small business that doesn’t benefit from a large metropolitan area is a little more difficult to analyze and I could not find hard data to perform these calculations.  I will make an assumption that the average small business gets 20 customers per day and using assumptions that only 80% of these transactions will give an average of $0.025 extra revenue the additional yearly profit for a very small business is not much, $146. 

Macroeconomic Analysis

While the typical small business won’t see a large profit increase from this new transaction system, I’d like to see what the total additional revenue would be for all businesses in the US if we instituted this new transactional rounding system.

From the following link, there are roughly 234 million Americans who are over 18 years old and if you assume that each of them makes at least two purchases per day (which I feel is conservative) then we’d see additional annual revenue to all US businesses of $3.424 billion using this modified transaction algorithm. 

This additional amount is not a huge change to the GDP (currently at $14.5 trillion) and by my calculations it would only amount to 0.02% increase in the GDP but this change is what I call ‘low hanging fruit’ and something that can be instituted quickly and give a capital injection to most businesses in the US.  This transactional proposal also doesn’t take into account the benefit the government will see from eliminating the penny from circulation since it costs our government approximately $0.017 to mint a penny. 

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One Response to Eliminating the Penny

  1. Lnda says:

    Or, everyone could just send their penny’s to me!

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