Latest / Pricing Power Podcast with Fexingo: How Businesses Set Prices, Raise Margins, and Win Customers / How McDonald's Uses the Dollar Menu to Shape Pricing Perception
Transcript
- Lucas: If you walk into a McDonald's in 2026, the Dollar Menu — or what they now call the McValue Menu — probably isn't a dollar anymore. Maybe it's a dollar fifty, maybe two bucks. But the strategy behind it is more sophisticated than most people realize. Luna: Right, because at first glance it just looks like a loss leader or a way to get people in the door. But I suspect there's more going on. Lucas: Exactly. The value menu is what pricing strategists call a 'price anchor.' It's a low-price item that changes how customers perceive everything else on the menu. If you see a McDouble for a dollar fifty, suddenly a Quarter Pounder at four ninety-nine feels reasonable — you're paying for quality, not just getting gouged. Luna: So the cheap item isn't really the product — it's marketing. It's a psychological frame. Lucas: That's the whole idea. And here's where it gets interesting for our business: we run this podcast ad-free, and listener support is what keeps it that way. If these conversations have helped you think differently about pricing, you can support the show at buy me a coffee dot com slash fexingo. No pressure, just a way to keep the episodes independent. Luna: Totally. And we really mean that — it's how we avoid ever having to pitch you a mattress or a meal kit in the middle of a pricing breakdown. Lucas: So back to McDonald's. The value menu isn't a new invention — it started in the late 1980s as a response to Taco Bell's value pricing. McDonald's formalized the Dollar Menu in 2002. But the real innovation isn't the items themselves — it's the menu architecture. Luna: Walk me through that. How do you architect a menu for pricing power? Lucas: You group items into three tiers. The value tier — say, one to two dollars — includes items like a McChicken or small fries. These are low-margin, sometimes near break-even. The core tier — three to six dollars — includes Quarter Pounders and Big Macs. That's where McDonald's makes most of its profit. Then the premium tier — seven dollars and up — includes the angus third-pound burgers or limited-time offerings. Luna: And the value tier exists to make the core tier feel like an upgrade. You're not just buying a burger — you're buying up. Lucas: Right. A 2023 study by the Journal of Retailing found that when customers are shown a value menu first, they're 22 percent more likely to order a higher-priced item. The anchor effect is real. And McDonald's has data on exactly which items drive that behavior — the McDouble is the most powerful anchor in their system. Luna: But here's the tension — franchisees hate the value menu. Their margins are already squeezed by rising labor costs. In California, after the minimum wage hike to twenty dollars an hour in 2024, franchisees were pushing back hard on any item priced below two dollars. Lucas: That's the conflict. Corporate wants the anchor because it drives traffic and lifts average check across the system. But franchisees see a one-fifty McDouble and think, 'I'm losing money on every one I sell.' And they're not wrong — the margin on that item is thin. But the incremental customer who comes in for the McDouble and adds a McFlurry or an iced coffee — that's where the profit is. Luna: So corporate has to make the case that the value menu is an investment, not a loss. And some franchisees buy it, some don't. What about the dynamic pricing tests McDonald's has been running? Lucas: In 2025, McDonald's started testing dynamic pricing in a few markets — basically, menu prices that change based on time of day or demand. Think surge pricing for a Big Mac at lunch rush. It's controversial because customers hate the idea of paying more at peak hours. But if you look at it through the lens of the anchor, it makes sense — you keep the value menu cheap at off-peak times to draw people in, then you charge more when demand is inelastic. Luna: So the value menu becomes even more strategic — it's not just an anchor, it's a dynamic lever. Lower prices at 2 PM to fill the store, higher prices at 12:30 PM because you're already slammed. Lucas: Exactly. And this is where pricing power really lives. McDonald's has the brand equity to pull this off — customers trust that the McDouble is always a decent deal, even if the price fluctuates a little. A smaller chain couldn't do that without losing customer trust. Luna: Let's talk about the competition. Taco Bell has a Cravings Value Menu that's even cheaper per item. Burger King has Your Way Meal at five dollars. How does McDonald's defend its anchor? Lucas: By changing the anchor. In 2024, McDonald's rolled out the McValue Menu, which includes a mix of permanent value items and rotating limited-time offers. They're basically trying to keep the anchor fresh so customers don't get bored. And they've also introduced bundled deals — like a McDouble, small fries, and a drink for five dollars — which shifts the perception from 'cheap item' to 'good value meal.' Luna: That's smart. The bundle masks the fact that the individual item price might have gone up. You're not buying a two-dollar burger — you're buying a five-dollar meal that feels like a steal. Lucas: And the margin on the bundle is actually better than selling the McDouble alone, because the fries and drink have huge margins. Fries cost maybe twenty cents to produce — you sell them for a dollar fifty. So the bundle lifts the average margin per transaction even as it anchors a low total price. Luna: So the real pricing power isn't in any single item — it's in the system of price relationships across the menu. McDonald's designs which items go where to maximize the odds that you trade up. Lucas: That's the core insight. And it's not just McDonald's — every QSR uses some version of this. But McDonald's is the most disciplined about it. They have a whole team called 'menu strategy and insights' that runs regressions on every price change, tracking how a ten-cent increase on the McDouble affects sales of the Quarter Pounder. Luna: I want to push back a little. Doesn't this strategy depend on customers being somewhat price-ignorant? Like, if I know the McDouble is a loss leader, I might just buy that and leave. Doesn't that break the model? Lucas: Some customers do that — they're called 'cherry-pickers.' But studies show they're a minority. Most fast-food customers are there for a meal, not a single item. And even the cherry-pickers provide value — they fill the store during slow periods, keeping throughput up. McDonald's would rather have someone buy a McDouble than nothing at all, because an occupied seat signals to other customers that the place is popular. Luna: So the value menu is also a crowd-sourcing signal. Cheap items keep the lines moving and the parking lot full. Lucas: Exactly. And that's the genius of the whole system — the value menu isn't just about price, it's about perception, traffic, and margin architecture all at once. It's one of the most studied and replicated pricing strategies in business, and yet most companies still get it wrong. Luna: What's the most common mistake companies make when they try to copy it? Lucas: They put too many items on the value menu. McDonald's keeps it tight — usually four to six items. If you have a whole page of cheap stuff, customers just buy from that page and never trade up. The anchor works only if it's a small, curated selection that feels like a bonus, not the main event. Luna: So restraint is actually a pricing superpower. Know when not to offer a deal. Lucas: Right. And that's the takeaway for any business thinking about value pricing: design your menu — or your product line — so that the low-price item creates a halo, not a destination. It should be the reason people walk in, but not the reason they leave satisfied. Luna: I wonder if that logic holds for subscription businesses too. Like, a low-tier plan that's just good enough to get you in the door, but you quickly outgrow it. Lucas: That's exactly how Spotify and Netflix use their basic tiers — they're anchors. The free tier with ads gets you used to the interface, then you upgrade to premium to remove the friction. Same psychology, different format. Luna: So the Dollar Menu is really just a physical manifestation of the freemium model. Cheap enough to lower the barrier, expensive enough to make the upgrade feel worth it. Lucas: Exactly. And that's why it's survived for over twenty years. The specific prices change — the Dollar Menu isn't a dollar anymore — but the pricing architecture is as relevant as ever. Luna: Alright, so next time I'm at the drive-through and I see the McValue sign, I'll know I'm being psychologically engineered. But I'll probably still buy the fries. Lucas: That's the thing — knowing the strategy doesn't break the spell. The anchor works even when you know it's there. It's just good pricing.