Price
McDonald’s has realised that, despite the cost savings inherent in standardisation, success can often be attributed to being able to adapt to a specific environment. This is indeed the case with its implementation of its pricing strategy, which is one of localisation rather than globalisation.
Table II illustrates the comparative Big Mac prices (flagship brand of McDonald’s) from around the world. It succeeds in highlighting the point that McDonald’s has had to come up with different pricing strategies for different countries. More importantly, rather than just having a different pricing policy for the Big Mac in these listed countries, McDonald’s has had to select the right price for the right market. The highest comparative price for the Big Mac is that of our own country, the UK, but why is that the case? How does McDonald’s come to its pricing decision?
Pricing decisions
For each country, there is a rigorous pricing process that is used to determine the price for that particular market. The process, as described by Vignali et al. (1999), is listed below:
(1) selecting the price objective;
(2) determining demand;
(3) estimating costs;
(4) analysing competitors’ costs, prices and offers;
(5) selecting a pricing method; and
(6) selecting a final price.
The process above sets out the basic framework that allows McDonald’s to set localised pricing.
McDonald’s overall pricing objective is to increase market share. In each country, they look at the demand for their product as a barometer for setting price. In the USA, for example, a Big Mac with fries costs the equivalent of a Chicago office worker’s earnings during 14 minutes. However, elsewhere, a meal like this is perceived as a luxury, as opposed to a normal product, and would cost a lot more relative to earnings. In Nigeria, for example, a corresponding meal would represent 11 hours 23 minutes of work for someone living in Lagos. Thus, depending upon the perception of price by the consumer, then will the price of the McDonald’s product be determined.
This can further be explained by looking at Vignali’s tactical model for MIXMAPping (see Figure 1). By looking at the product MIXMAP, it is clear that, although placed in the same box, the consumer in Lagos perceives the McDonald’s products as having more quality than the consumer in Chicago. Therefore, in Lagos, the consumer will be willing to pay a higher price relative to their earnings; hence, McDonald’s prices its goods accordingly.
This pricing strategy does not always work successfully, though, as was the case in the USA in 1997 when McDonald’s was losing domestic market share. To combat this, they had to lower prices in an attempt to increase revenues. Similar efforts had also to be made in Japan for the same reason, proving once more the importance of correct price setting.
The official stance on McDonald’s pricing policy is highlighted in the company’s mission statement, where it states that the most fundamental element of determining price was:
Being in touch with the pricing of our competitors allows us to price our products correctly, balancing quality and value.
Therefore, it is possible to conclude that, by looking at other competitors in each country, McDonald’s can set the appropriate price for their products. In New Delhi, India, McDonald’s was looking at market penetration in October 1996, and set price through looking at Nirula’s, a local food chain. They used this local example as a guideline to what the Indian would perceive as an acceptable price and hence what they should charge.
A comparative survey of prices was carried out in Hong Kong in June 1994 and demonstrated that McDonald’s in price is equal to or cheaper than its competitors in the fast food sector. The remarkable thing is, however, that not only is McDonald’s competitive in the fast food sector but its prices remain competitive with those of other food purveyors. In Hong Kong, for example, an average “value meal” is less than half the price of a simple noodles meal!
It is also important to look at the life cycle of a product/brand before setting price, as then it is possible to select a pricing strategy from this (see Figure 2). The product life-cycle (PLC) in Figure 2 is a further example of how the McDonald’s pricing strategy is one of glocalisation. The comparison is made between the markets in the USA and Japan, who are at contrasting stages of the PLC. If we use the example of the Big Mac, as illustrated in Table II, we can see that in terms of the UK£, in the USA, the Big Mac is priced at £1.13 and in Japan, it is priced at £1.27. This is explained because the US market is in the decline stage of the PLC and so has to cut prices to re-establish lost revenue, as was the case in 1997. On the other hand, the Japanese market is in its growth to maturity phase and so can price the Big Mac higher with greater success in terms of profitability.