Page 357 - Introduction to Business

CHAPTER 9 Developing the Product and Pricing Mixes 331

Case in Point

McDonald’s Offers a $1-Item Menu

Until the third quarter of 2002, McDon- included on the $1-item menu had been priced
ald’s had always posted a profit. How- around or a little more than $1.
ever, for the third quarter of that year, There were no “big ticket” items on Wendy’s 99¢
company officials announced a loss. “Super Value Menu.” All had cost about $1 or slightly
At about the same time, a cutback in the number higher. They included
of international stores being opened and the closing of Chili Chips ‘n Cheese
some 175 outlets already in place was indicated. It was Crispy Chicken Nuggets
well known that the world’s largest fast-food chain was Jr. Bacon Cheeseburger
having problems with customer service. Many cus- Jr. Cheeseburger Deluxe
tomers had complained about having to wait too long French fries (medium)
for orders and rude and incompetent personnel. Soft drink (medium)
In the middle of 2002, McDonald’s began offering Frosty dairy dessert (small)
a $1-item menu. For several years prior, one of the Chili (small)
company’s major competitors, Wendy’s, had had a Sour cream & chives potato
very successful 99¢ “Super Value Menu.” Included on Side salad
McDonald’s $1-item menu were Caesar side salad
Hot ‘n Spicy McChicken
Big ‘n Tasty Questions
Two pies 1. Which low-priced menu—Wendy’s or McDonald’s—
Sundae (caramel or fudge) do you believe will be more successful?
Side salad 2. Will offering a number of items for $1 overcome
Medium soft drink customer dissatisfaction about the level of service
Medium fries McDonald’s is providing?
Snack size fruit/yogurt parfait 3. Does the fact that the items on Wendy’s “Super
The first two items—Hot ‘n Spicy McChicken and Value Menu” are priced at 99¢ give it an advan-
the Big ‘n Tasty—were only temporarily $1 items; tage over McDonald’s, which prices its items at
they ordinarily sold for about $2. The other items $1? Or is this a disadvantage?

force, and so on. The greater this level of effort, the higher the price that can
be justified. The lower the level of support, the lower the price.
6. Estimating demand involves a decision as to how many units are likely to be
sold at various prices. Competitor prices, distinctiveness of the product, and
level of marketing effort affect demand.

Changing Prices for Existing Products

Whether a demand curve is elastic or inelastic is important in deciding whether a
product’s price should be raised or lowered.
An elastic demand curve represents the situation where the market is very elastic demand A combination of prices
responsive to a product’s price. Exhibit 9.9a (on p. 332) shows an elastic demand and quantities demanded that indicates
that the market is very responsive to
curve that tends toward the horizontal. With an elastic demand for a product, price
prices
decreases are desirable, but not price increases. At a price of $10, four units will be
sold, yielding total revenue of $40 ($10 4 $40). Decreasing the price to $9, how-
ever, increases total revenue to $72 ($9 8 $72). Note that increasing the price
with an elastic demand curve will lower total revenue. In Exhibit 9.9a, we see that
increasing the price from $9 to $10 would reduce total revenue from $72 to $40.

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