McDonald’s Pricing Mystery
I enjoy eating Big Macs (there is something special about two all-beef patties, special sauce, lettuce, cheese, pickles, onions, on a sesame seed bun that just can’t be replicated anywhere else), but really don’t find buying them at full price particularly worth my while, so my visits to McDonald’s are typically few and far between.
About two months ago I went to McDonald’s on a whim and discovered a fantastic new deal (presumably limited time offer), the $6 Classic Meal Deal. I can get a Big Mac, small fries, drink, and pie(!) all for $6! The deal does give you the choice of a quarter pounder or 10 piece nuggets as well, but for now, let’s just focus on the Big Mac (after all, that’s what macroeconomists use in their studies :))
Since this deal has been introduced, I have actually gone to McDonald’s once a week to take advantage of this offer. A regular Big Mac Meal costs $9.09, you get medium sized fries instead of small, but you also miss out on the pie (oh that soft and warm pie!). With that being said, the Classic Meal Deal is from a value perspective, vastly superior to the regular Big Mac Meal. An extreme analogy to this would be if Apple started offering two versions of an iPhone, both with the same specs except one has a better camera, and the one with the better camera was priced 30% lower, a situation that defies logic. This was perplexing to me so being a business school student, I started thinking about why McDonald’s would pursue such a strategy.
Let’s first take a look at the economics of the Classic Meal Deal (CMD)vs the Big Mac Meal (BMM). I’m going to assume that McDonald’s typical cost of goods sold is 47.5% based off financials from WSJ (some nuances here given franchise business models and product mix, but going for simplicity).
The key takeaway here is that the BMM is 3x as profitable as the CMD! McDonald’s is offering a product with higher value that costs less for the customer and is substantially less profitable. Why do this? Here are a few of my thoughts.
- From my experience, the deal is not very well advertised in-store or in other marketing channels (this is likely done deliberately, to prevent too many customers from trading down), so some customers will not even discover it and still go for the regular Big Mac Meal.
- The deal is targeting a new segment of customers such as myself, who don’t want to pay full price for the regular meal deals but also don’t want to go the ultra-low end route and order off the dollar menu.
- The deal may end soon, but they may convert some % of this segment of customers into those who stop by regularly and pay for the full-priced meal.
- The deal may be more profitable than their dollar menu items and could incentivize some of the customers who would have previously purchased only off the dollar menu to trade up.
- They could be more profitable even in the short-term, assuming that the incremental profit they get from increasing visits from customers such as myself isn’t eroded by regular customers trading down from BMMs to CMDs.
Overall, the Classic Meal Deal is a fascinating pricing and marketing strategy that defies logic at first blush but starts making sense once you dig deeper into the details.
Until next time!
