Case study: Price offers at McDonald’s

The story
By 1997 about 85 per cent of McDonald’s 12,500 US restaurants were owned by franchises, while the rest were directly owned by the company.

In the US, McDonald’s sales comprised about 25 per cent of all fast-food sales. The nearest competitor, Burger King, had 11 per cent of fast-food sales. McDonald’s was taking 40 per cent of the money spent on hamburgers in the US.

The challenge
McDonald’s faced slowing sales growth and stiff competition in the US and abroad.

After a string of new product successes in the 1980s, such as Chicken McNuggets and a successful breakfast food launch with offerings such as the Egg McMuffin, McDonald’s experienced a series of failed products, including the Arch Deluxe, the McLean Deluxe, the McPizza and McPasta.

The outlook for McDonald’s franchises in the US was changing too, because rapid expansion in the number of stores led to cannibalisation of existing stores’ profits. Profit per location had dropped to $95,000 in 1996 from $120,000 in the early 1990s.

McDonald’s needed to figure out a way to drive traffic into the stores.

The strategy
McDonald’s devised a year-long price promotion, “Campaign 55”, that would feature a different hamburger sandwich each month at the bargain price of just 55 cents, in honour of the 1955 founding of McDonald’s. The promotion began with the company’s flagship product, the Big Mac, then usually priced at $1.99.

What happened
The outcome was not what McDonald’s had planned. In February 1997 details of the Campaign 55 promotion were leaked to the press and franchisee reaction was immediately negative. They predicted – correctly – that such a bold price reduction would confuse consumers who had come to understand and expect that they already had the best deals McDonald’s could offer.

Value pricing had become an important part of the fast-food market, where consumers were encouraged to purchase “meal deals” in which products were bundled together – typically, a hamburger, fries and a soda. Such value pricing offered a discount against the price of the items when purchased individually.

Further consumer confusion – and ultimately, revolt – ensued when they turned up at McDonald’s restaurants to purchase Big Macs for 55 cents and found the small print: the special promotion was available only if the customer also bought an order of fries and a drink – the same bundle of items as the McDonald’s “Extra Value Meal” deal.

In reality, the Campaign 55 pricing represented a 13 per cent discount from the existing Extra Value Meal bundle, and a substantial discount if the three items were purchased separately.

But consumers were unable to make the price comparison with the ordinary Extra Value Meal and see that the 55 cent promotion was a better deal ($3.03 for the promotional bundle vs $3.49 for the Extra Value Meal, and $4.47 for the items brought separately). As a result they widely perceived the tactic as a “bait and switch”, a way to get them to buy the more expensive option.

After a few months, amid consumer and franchisee dissatisfaction, McDonald’s pulled the promotion.

The lessons
In a mature industry, sales promotions renew excitement and generate new sales. However, McDonald’s had a series of missteps with Campaign 55.

First, the company learnt that it would have to consider the consumer more fully when it came up with such a complicated deal.

Second, the company would need in future to consider the franchisees properly. They saw the 55-cent price attached to Big Macs as eroding the perceived value of their signature sandwich when they were already feeling financial pressure due to rapid store expansion.

Lastly, such an extreme price cut was likely to attract people who look out for deals anywhere, but have no brand loyalty.

This case is adapted from a Berkeley-Haas case study, “McDonald’s 55 Cent Promotion”.

For more information, go to: http://cmr.berkeley.edu/berkeley_haas_cases.html
- Financial Times, 20 Feb 2012