Pricing the Product
Read this chapter. Pricing is a difficult issue because most products will sell at some volume at just about any price level. Some customers are willing to pay almost any price for a specific product, but how many of those customers exist? Marketers could consider a value-priced model, but this may make the product's price so low that there is no way to profit. One common pricing strategy is known as "the loss leader", which involves selling one product below the cost to manufacture it to get it in customers' hands. They make up for this loss later with complementary goods. This is commonly seen in video game console sales. Console system manufacturers like Sony and Nintendo will price the system below the cost to manufacture it. Consumers adopt the systems due to the attractive price point, and the manufacturer makes up for the initial loss on the system with sales of proprietary accessories and video games.
THE MCDONALD'S EFFECT
McDonald's is one humongous company. With 21,000 restaurants in 101 countries, it is everywhere–which is why the global economy is sometimes called McWorld. Back home in America, the executives that run this vast empire are not feeling very lordly. More than ever they find they have to kowtow to the price demands of ordinary folks like Alonso Reyes, a 19-year-old from Chicago who works at a local car dealership. Never mind that Chicago is McDonald's world headquarters - he splits his fast food patronage between McDonald's and its arch-rival, Burger King, and counts every pennyworth of beef when deciding where to eat. So Reyes perked up when he heard that McDonald's had announced "an unprecedented value offering"–a USD 0.55 Big Mac that the company boasted was bad news for their competition. "Cool," said Reyes, "Coupons, specials, sales. I'll take whatever I can get".
For McDonald's top management, this pricing strategy made perfect sense. After all, declining same-store sales in the US were the chain's most glaring weakness. What better way to put some sizzle in the top line than a bold pocketbook appeal?
Well, McDonald's executives should have realized that there is, in fact, a better way. Apparently they took no notice of the fallout when Phillip Morris announced deep cuts on "Marlboro Friday", or of "Grape Nuts Monday", when the Post unit of Kraft Foods kicked off a cereal price war. Predictably, "Hamburger Wednesday" sent investors on a Big Mac attack, slicing 9 per cent off McDonald's share price in three days and dragging rival fast-food issues down with it. "It looks almost desperate," says Piper Jaffray, Inc. analyst Allan Hickok of the USD 0.55 come-on. Adds Damon Brundage of NatWest Securities Corporation: "They have transformed one of the great brands in American business into a commodity".
In theory, McDonald's plan will payoff, because customers only get the discount if they buy a drink and French fries, too. Yet that gimmick-within-a-gimmick threatens to undermine pricier "Extra Value Meals", one of the chain's most successful marketing initiatives. Consumers expecting cut-rate combos will not go back to paying full price, especially if other fast-feeders discount their package deals.