As such, there are relatively few substitute goods (other types of foods are more expensive and, as a result, cannot be considered as substitute goods), the level of necessity is high (fast food is, for many of the poorer communities, the only source of food and, because of this, people are willing to pay a higher price without changing their volume of consumption), but also because of habits: people who consume fast food will simply grow too attached to it to give it up even if the price is slightly increased.
There is also another important element to be mentioned: the price hikes were reasonably low. For a $5 Big Mac (the price is actually lower, but as a reference), the 3.3% increase in its price represents $0.165. The amount is significantly low, too low to be noticeable by the consumer when completing his individual purchase. Added over time and over the high volumes that are being sold, however, this does represent an important financial impact.
The previous paragraphs represent a theoretical analysis of the price elasticity of demand in the case of McDonald's products in Australia and, as a concrete fact, the expected results of a demand-based pricing strategy. The paragraphs below will examine what actually happened.
McDonald's Australia reported for 2009 a 6% increase in revenues from sales to $898 million
. The main reasons that are quoted as having led to the increase in revenue are a series of refurbishments for different restaurant locations, as well as the fact that the menu was diversified so as to include healthier options. None of the two reasons seem to be correlated to an increase in prices, which may mean either that neither revenues (total or marginal) was affected by the increase in prices and the change to a demand-based pricing strategy or that the impact was significantly small and, as such, not recorded as an overall cause. The overall revenue of McDonald's Australia was $1.7 billion in 2009, although this was also not related to the new pricing strategy, but rather to the recording of a sale to McDonald's Asia Pacific.
1. Where do you live?
2. What is your average income?
a. Under $15,000
c. Over $25,000
3. What is your education?
a. High School diploma
b. College Education
c. Masters or higher
4. How often do you eat at your local McDonald's?
a. once a week
b. 2-3 times a week
c. 3-5 times a week
5. How much do you expect to pay for a Big Mac or similar?
c. Higher than $5
6. How would a 20 cents increase in the price of your Big Mac influence your purchasing preference?
Explanation of survey
The first three categories of questions plan to associate the socioeconomic status of the participants in the survey. Most of the respondents had an income of at most $25,000 a month and usually just a high school education. On the other hand, question 4 was used to determine both the preference for fast food and, in particular, for McDonald's among all the other fast food outlets. Questions 5 and 6 in the survey were used to determine the price sensitivity of the McDonald's products, notably that of the most representative product, as well as the price elasticity to demand.
Out of the total of 45 people that were included in the survey, 80% were included in the first two categories of income, which is important to determine the structure of the surveyed group from a socioeconomic perspective. At the same time, 74% mentioned eating at the local McDonald's at least 4 times a week, showing that the group is relevant from the point-of-view of the subject of the survey. The most important question for the purpose of the survey, question 6, had 81% of the respondents point out that their purchasing preference was not influenced by the increase in the product price or by any change to McDonald's pricing strategy, as described. This 81% are important to the final conclusions on the impact of a demand-based pricing strategy on the revenues at McDonald's.
Limitations of survey
The survey is limited because of the reasonably low number of respondents. Despite the fact that most of them belong to the same socioeconomic category and that their answers show that the increase in the price of McDonald's products did not affect their purchasing preferences (both in terms of turning to other fast food companies or other food products in general), the survey was done, because of the material and technical constraints, on a limited number of people. Around 1,500-2,000 would have probably been a volume that would have reduced such limitations. At the same time, the survey was also limited geographically: although this is most likely not the case, it is possible that other Australian communities with low socioeconomic scores have different results for the survey, namely that demand in those areas has been more affected by the new pricing strategy that McDonald's has implemented.
The theoretical analysis, which included an analysis of the available statistical information, of the market structure in the restaurant industry in Australia, as well as of the financial results of the company following the implementation of the new pricing strategy, as well as the results of the survey supported the initial hypothesis that was proposed at the beginning of the 3rd part of this paper. Basically, the conclusion can be split into two different parts, (1) the new demand-based pricing strategy had no impact on the consumption habits of the analyzed community and (2) because of a similar level of demand, the overall and marginal revenue levels at McDonald's Australia increased, as the statistical data also showed (although the source used in this paper provided a different explanation, namely the fact that many of the restaurants were refurbished and new, healthier options were included on the McDonald's menus throughout the country).
When drawing the conclusions, there are several important things worth pointing out, as well as reemphasized. The first is that the market structure plays an important role in the final outcome of the impact of the demand-based pricing strategy on the revenue levels at McDonald's. As such, while the restaurant industry in its entirety is a monopolistic competition, with a large number of sellers and buyers, the fast food sector of this industry is a particular oligopoly, with few sellers, very undifferentiated products and a low price elasticity to demand.
With the conclusions related to the nature of the market structure in mind, the paper was able to initially conclude that, given the market structure and the mentioned particularities, it is less probable for the consumption preferences to be affected by a slight increase in prices. There is less of an incentive to switch to a different brand of a fast food product that in other sectors of the industry or, in fact, in other industries. In theory, the consumers will accept an increase in price because they cannot switch out of the food segment they are in (because of their socioeconomic status) and because there is not a sufficiently significant difference between the fast food brands to induce the change.
A very important element that was emphasized in the paper is the fact that the marginal cost that the consumer associates with a daily purchase of a fast food meal after the new pricing strategy was adopted is remarkably small. The estimate was of about $0.15, in the case of a Big Mac, which means that the increase in the price that the client will pay is not likely to be significant enough to induce a change in consumer preference.
The socioeconomic factor is obviously essential in the analysis. The low socioeconomic scores in the areas that are being analyzed (along with the low income and low educational levels that were also indicated by the survey) propose the fact that the pricing strategy was adapted to these areas, relying on the fact that consumer preference is not likely to change. The reason is quite simple: the poverty in these areas means that people will be paying the additional $0.20 for a Big Mac because they cannot afford anything else.
The results of the survey confirmed many of the theoretical conclusions that were drawn beforehand, notably the fact that consumers are not likely to change their preference of food products based on the new pricing strategy that McDonald's has implemented. The socioeconomic score does contribute to this in a good deal.
As a result, with demand (and, as such, quantity) remaining the same and the prices slightly increasing due to the new pricing strategy, the overall and marginal revenues at McDonald's Australia increased throughout 2009, the year after the period when the company implement the demand-based pricing strategy. This was translated…