How McDonald’s is Getting Smarter on Pricing
McDonald’s Investor Day event last week featured several headlines – CosMc’s, ambitious development plans, a technology partnership with Google, etc. But one of the quieter narratives to emerge was the company’s approach to pricing.
As traffic indicators point to a threshold on menu pricing, operators are scrambling to find alternative solutions to offset stubbornly high costs. McDonald’s has a unique advantage here – scale. Indeed, “scale” was a major them throughout the Investor Day event and, as CEO Chris Kempczinski said, “McDonald’s unmatched size and scale gives us competitive advantages that no one else can match. In our rapidly evolving industry, I believe benefits of scale will become even more pronounced.”
One of those benefits, he added, is “pricing tools get sharper.”
This sharpness comes from the company’s digital and technology updates, which are part of its One McDonald’s Way initiative announced earlier this year. As Kempczinski described in Q2, One McDonald’s Way examines “horizontal” ways of working and digitizing the organization with the ultimate goal of breaking down global silos to achieve stronger efficiencies in a pressured environment.
That goal extends to value, a critical driver of McDonald’s – and most chains’ – success at this moment. Jill McDonald, president of IOM (international operated markets), said the company is starting to take a more personalized approach to value and that approach is facilitated by its technology investments. Chief among those investments is McDonald’s loyalty program, initially launched in 2021. The program now counts 150 million 90-day active users, and the chain predicts that number will grow to 250 million by 2027. Of course, more users equal more data about customer habits, preferences, and so forth, which allows McDonald’s to better personalize its messaging, including increasingly important value messaging. In other words, McDonald’s is getting smarter on pricing in large part because it’s sharpening its focus on its loyalty program.
“Despite significant inflation over past two years, our approach to strategic pricing, the strength of our brand and the overall value proposition we provide enables our ability to evolve our pricing structure and maintain our value leadership position. We also recognize that the meaning of right price and value varies by customers. Some are more price sensitive than others and there has long been an opportunity for McDonald’s to get more targeted in its pricing,” McDonald said.
Throughout the past several years, the company has built a suite of proprietary pricing tools to complement its strategy “rooted in customer behaviors and insights,” McDonald said.
“We’re evaluating pricing opportunities at an individual restaurant and menu item level,” she added.
This new-ish approach has enabled McDonald’s to limit customer resistance. When the company leverages its pricing tools, it is able to price at a level the consumer will better accept than when it doesn’t leverage its pricing tools. This, McDonald said, maximizes flow through rates and leads to higher sales.
“Franchisees see the value of this and adoption rates for our pricing strategy are high,” she added.
Expect this strategy to swiftly evolve as McDonald’s leverages machine learning at scale to gather even more consumer data from loyalty users. The company just announced a partnership with Google Cloud to connect its technology and apply generative AI solutions across its global system. In 2024, McDonald’s will deploy new software across its digital platforms to “roll out innovation even faster.”
“As we continue to learn more about our loyalty customers, gathering data on how they visit us and what they buy, we’ll leverage machine learning at scale and get even smarter with our pricing methodology. This will enable us to personalize with even greater precision by looking at thousands of customer cohorts, when we used to have less than 10,” McDonald said. “Even as we’re just starting to build out our personalization capabilities, we’re already seeing loyalty customers in the U.S. visit with 15% greater frequency and spend nearly twice as much on average as non-loyalty customers.”
She expects this evolution to create more targeted digital offers and, consequently, a better return on any discounting investments made by the chain.
“Taken all together, this is the future of McDonald’s value,” she said.