Rafi Mohammed

McDonald’s Push for Low Price Growth

Posted on December 16th, 2009 (0 Comments)

After an incredible run of growth courtesy of diners trading down from their de rigueur restaurant meals to Big Macs and Quarter Pounders, McDonald’s has hit a wall. Same store sales have decreased over the last two months. So what business strategy is the fast food giant using to keep feeding profits and growth to its investors? Pricing…of course.

Weak breakfast sales are being attributed to the usual suspect: the economy (less eating out money, fewer people going to work). To reverse this trend, McDonald’s is betting that big discounts will attract new customers. Starting in January, McDonald’s is rolling out a dollar breakfast menu that includes its signature Sausage McMuffin as well as Sausage Biscuits, burritos and hotcakes. Several analysts have expressed hope that some dollar menu customers will spring for more profitable items like coffee or orange juice.

While extra high margin purchases would be nice, even the thrifty who order a dollar menu item and tap water will generate new profits. Going back to an ongoing ]\disagreement that I have with many readers of this and the Harvard Business Publishing blogs (profits count more than operating margin percentage), if the dollar menu brings in new, albeit low margin, customers (and cannibalization is minimal – in other words, regular customers don’t trade down to dollar menu items), profits will be higher at the end of every breakfast shift. A dollar menu draws in new customers who otherwise would not be walking through the Golden Arches.

Most companies have the opportunity to profitably roll out discount prices. As long as cannibalization is minimal - I probably would not have included a signature McMuffin sandwich on the dollar menu - low prices (read: low margin) result in sales that would not have otherwise occurred.

Don’t let the stigma of low margins stop your business from growing – the key to better pricing is to offer a variety of tactics (“value” products, for instance) that serve as many customers as possible.

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