On 29 February 2016, McDonald’s raised the price of its McPick 2 for $2 to 2 for $5 in the U.S. Customers now get to pick two items for $5 from this list (Figure 1):
- Big Mac
- a 10-piece order of McNuggets
- Quarter Pounder with cheese
Figure 1: The new McPick 2 for $5 (Source: McDonalds Corporation)
A month earlier, the McPick 2 for $2 lets customers choose from the McChicken and McDouble sandwiches, mozzarella sticks and small fries (Figure 2). The new product was more expensive than that of McDonald’s rivals. Wendy’s 4 for $4 meal included a junior bacon cheeseburger, chicken nuggets, small fries and a small drink. Burger King charged a 5 for $4 meal that included a bacon cheeseburger, chicken nuggets, small fries, small drink and a cookie.
Figure 2: The former McPick 2 for $2 (Source: McDonalds Corporation)
How does McDonald’s determine its pricing strategy? This blog analyses several articles to answer that question.
2. McDonald’s pricing strategy
In business marketing, there are three generic strategies: focus, differentiation and cost leadership. McDonald’s has been successful at employing cost leadership marketing strategy by offering fast food meals at low prices (Scilly 2016). Prices have been kept low by:
- hiring and training inexperienced employees instead of trained cooks
- hiring only few trained managers
McDonald’s pricing strategy also involves price bundling combined with psychological pricing. In price bundling, the company offers meals and other product bundles for a discount. In psychological pricing, McDonald’s uses prices that appear to be significantly more affordable, such as $__.99 instead of rounding it off to the nearest dollar. This element of McDonald’s marketing mix highlights the importance of price bundling to encourage customers to buy more products (Meyer 2015).
McDonald’s itself (2007) is vague about its pricing strategy; the company understands that a customer’s perception of value is an important determinant of price charged. Using low price as a marketing tool may promise customers a product of compromised quality. Moreover, competitors can respond in a price war resulting profit margins reduced without increasing sales.
2.1 McDonald’s pricing decision
Despite the cost savings which is characteristic of standardisation, implementation of McDonald’s price strategy is localised rather than globalised (Vignali 2001). McDonald’s has different pricing for different countries. Each country undergoes a strict process to determine the price for a particular market. The process (Vignali et al 1999) is:
- selecting the price objective
- determining demand
- estimating costs
- analysing competitors costs, prices and offers
- selecting pricing method
- selecting the final price
The process above is the basic framework that McDonald’s uses to set up localised pricing.
McDonald’s pricing objective is to increase market share (Vignali 2001). McDonald’s mission statement highlights its pricing policy; the most fundamental element of determining price was:
Being in touch with the price of our competitors allows us to price our products correctly, balancing quality and value.
For instance, to penetrate the market in New Delhi, India in 1996, McDonald’s set their price by looking at Nirula, a local food chain.
As another example of the ‘glocalisation’ phenomena, McDonald’s also sets prices according to the product life-cycle (PLC) as shown in Figure 3. In 1997, the US market was in the decline stage of the PLC so the price of a Big Mac was lower than that of in Japan. The Japanese market was growing to maturity so a high priced Big Mac was profitable.
Figure 3: The product life-cycle as a determinant of price (Source: Kotler 1994).
Though McDonald’s pricing strategy is successful at implementing cost leadership marketing strategy, its overall objective is still to increase market share. Arriving at a pricing decision is the result of analysing demand, costs, competitor pricing, a product’s life-cycle and then balancing quality with value.
Kotler, P. 1994. Marketing Management, Prentice-Hall, Englewoods Cliffs, NJ.
McDonald’s Corporation. 2007. Marketing at McDonald’s, retrieved 02 May 2016 <http://www.mcdonalds.co.uk/content/dam/McDonaldsUK/People/Schools-and-students/mcd_marketing.pdf >.
Meyer, P. 2015. McDonald’s marketing mix (4Ps) Analysis, retrieved 02 May 2016 < http://panmore.com/mcdonalds-marketing-mix-4ps-analysis >.
Scilly, M. 2016. Examples of cost leadership & strategy marketing, retrieved 02 May 2016 < http://smallbusiness.chron.com/examples-cost-leadership-strategy-marketing-12259.html >.
Vignali, C. 2001. McDonald’s: “think global, act local” – the marketing mix”, retrieved 11 January 2016 < http://www.emeraldinsight.com/doi/pdfplus/10.1108/00070700110383154 >.
Vignali, C. et al. 1999, British Food Journal, vol. 101, no. 5/6.