I’m loving it! – Pricing takeaway for B2B 

What B2B companies can learn from McDonalds

Revenue is vanity, profit is sanity. While it is true that a B2B company may prioritize revenue and market-share growth over profit growth in its start-up phase, eventually all B2B companies must pursue a profitable growth – not just revenue / volume growth. To achieve a profitable growth, price increase is a more powerful lever than cost reduction. Of course, raising prices is not easy – but if you believe that your product is more differentiated than a Big Mac, then you can successfully raise prices too! Read on…

McDonald’s in the 1990s – pursuit of volume growth

In the 1990s, McDonald’s was on a breakneck outlet-opening trajectory, opening globally on an average 1000+ outlets every year. The strategy appeared to work initially, with the stock market also responding favorably (Part 1 in Figure 1). Jack M. Greenberg became McDonald’s CEO in 1998 and initiated many activities to further fuel its growth, most importantly his “Made for You” system in kitchens to improve product quality, and a slew of niche premium products to win over the consumer. Unfortunately, this strategy put brakes on the stock price (Part 2 in Figure 1). There were three key reasons for this: i) Cannibalization of sales among outlets due to excessive store openings ii) “Made for You” system increased waiting times – counter to consumer’s quick service expectations, and McDonald’s premium products did not immediately click with the consumer and iii) Prices decreased in real terms, i.e., did not keep pace with inflation. Eventually, 2002 became a watershed year for McDonald’s. In January 2003, McDonald’s declared its first ever quarterly loss in its history as a public listed company. Greenberg was abruptly replaced by Jim Cantalupo. In the aftermath, McDonald’s stock reached a historic $12.4 low in March 2003.

2003 – Turnaround backed by a clear focus on profitable growth 

Jim Cantalupo who had built his career at McDonald’s over three decades and had retired, was brought out of retirement to succeed Greenberg. After taking over, Cantalupo vowed to “go back to basics” and launched his “Plan to Win” strategy. Cantalupo’s “Plan to Win” strategy reigned in the pace of outlet expansion and focused more on growing sales at existing outlets, and on improving 5Ps – people, products, place, price and promotion. The strategy led to improved service times, a fresher ambiance at outlets, a healthier and balanced choice of products between value and premium, and a better connect with consumers through the “I’m Loving It” campaign. As a result, McDonald’s performance improved considerably, already by the end of 2003, with a robust 50% growth in operating income. Its stock doubled to $25+ already by January 2004 from the all-time low in March 2003 (Part 3 in the Figure 1). McDonald’s continued its positive trajectory for well over a decade past 2004, riding on the back of Cantalupo’s strategy, despite his untimely demise in 2004.

But there is more than meets the eye – Increasing Prices and making them work 

No specific information on price increases is available in the official “Plan to Win” story narrated by McDonald’s – and neither did we expect any – after all which B2C company would want to alert public and its customers on price increases? We do not have access to historical pricing data for all McDonald’s’ products, but we do have access to price movements of the flagship Big Mac burger. The underlying pricing story and its potential impact on stock price becomes more obvious after comparing the actual and inflation-adjusted price increases in the US across the 3 parts over 1992-2012 as shown in the Figure 2 and described below:

  1. 1992-1999 Pre-Greenberg era (Part 1 in Figure 2): Volume growth was driven by store openings, but with stable profits, leading to a growth in stock price as well. Note that the Big Mac price moves in step with inflation.
  2. 1999-2004 Greenberg era (Part 2 in the Figure 2): Volume growth came at the expense of profits. Note that the Big Mac price reduces in real terms. Furthermore the “Made for you” would have added further costs in the system. As a result, the stock price declined
  3. Beyond 2004, Cantalupo era and beyond (Part 3 in the Figure 2): Sharp increase in the price of Big Mac (as a proxy for all product prices) that drives an even stronger increase in stock price than in the early 1990’s

Deeper analysis revealed that the above-inflation price increases from 2003 onward were implemented not only in the US but also across other markets in the world, based on a sample of markets that we analyzed. While we are not privy to internal decisions of McDonald’s, the data analysis strongly suggests that the shift in focus, from, growing volume by opening more outlets, to getting more out of existing outlets aided by price increases, worked for McDonald’s. Furthermore, the McDonald’s price increase worked because it was able to position the price increase in a way that met the customer’s needs and motivated the customer to pay those higher prices.

Learning for B2B Pricing 

  1. Pricing is an important tool to improve profits and hence create value for shareholders – If your company is growing at the expense of profits, it will eventually destroy value. Getting your pricing right can make the difference.
  2. Every B2B company has an opportunity to increase prices – if a price of a burger can be successfully increased, why not the price of your company’s product? Surely it is more differentiated than a burger!
  3. To get customers to pay, the value they receive needs to meet their expectations, not yours – The “Made for You” approach was started with McDonald’s belief that customers want higher quality, customized products and are willing to pay a premium price, but it increased wait times and worked against that #1 requirement of customers’ – quick service. On the other hand, the reason the “Plan to Win” strategy made the higher prices work is because it focused on the 5P and delivered ‘value’ as perceived by the customer.

If you have further questions on how to improve prices in your business, feel free to contact us at pricing@b2bgrowthconsulting.com

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About the authors:

 

Kedar Gharpure is the Director of B2B Growth Consulting Ltd. He has served business heads of several Fortune 250 and Private Equity owned B2B companies on growth strategy and commercial transformation.

 

Vidya Ranade is the founder of Decodexis, a company that provides bespoke analytics and consulting services to clients in marketing & sales, operations and R&D.

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2 thoughts on “I’m loving it! – Pricing takeaway for B2B”

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