Explain fast food pricing to me like I'm 5 years old.

May 15, 2015 12:17 AM

I ordered a meal in a Burger King a couple of days ago and it was over $12. I ordered the exact same thing in a different city today and it was about $8.50. Explain this to me. Obviously, meat and potatoes are not the only thing being factored into that price difference.

I mean, I am not entirely stupid. Obviously, rent of the building and stuff like that factors into that. But how is that determined? How do they determine that they need to charge x at this location and 1.5x at another?

Thanks!

posted by Michele in California to Grab Bag (12 answers total)

A higher price will sell a few less meals, but they make a bit more on each meal.

Alternately, if they drop the price, they sell more meals but make a little less on each meal.

In each city the trade off is a bit different; they set the price in each city differently to maximize what they make overall.
posted by dave99 at 12:24 AM on May 15, 2015

Best answer: Many fast food restaurants are franchised, which means individual stores are owned and operated by many different owners. The big chains tend to have some corporate-owned locations, but the majority are franchises. The legal situation is complicated, and has been altered by new decisions in anti-trust law over the last few years apparently, but franchisees generally can set their own prices.

A quick google on "franchise fast food price disparity" brings up some interesting looking academic articles on the phenomenon including: "Fast Food Restaurant Pricing Strategies in Michigan Food Deserts" and "Price Control In Franchised Chains: The Case Of McDonald's Dollar Menu."
posted by zachlipton at 12:41 AM on May 15, 2015 [6 favorites]

Best answer: (Extrapolating from franchising in general, not fast food in specific so am willing to be corrected by an expert.)

Depending on the chain, they may set price guidelines relative to the market area for the franchisees. "Lowest price in all categories in a given territory", etc. Price will be directly connected to brand and while they probably can't do literal price setting from the franchisor, they will need to make sure that the franchisee doesn't charge well above the market and damage the brand.

A franchisee will have a certain level of PBIT they need/expect to achieve, and they will put that together with pricing guidelines (if any) to determine the pricing strategy.

Real estate, taxes, labor, competition prices, local price levels, local income, level of service, supply chain-- there are literally thousands of factors. But usually it starts with the basic-- how much to I expect to earn, and what are my frameworks for earning it?
posted by frumiousb at 1:46 AM on May 15, 2015 [1 favorite]

Best answer: Price and cost (in general) are less related than you think.

If my fast food place is in the finance district, only competing with restaurants and half an hour from anywhere, I'll charge way more than if my fast food place is next to the supermarket and everybody's home and three hole in the wall snack places.

Of course, in that first place the rent and staffing costs will be a lot higher, but that's not necessarily the main driver for the price hike.
posted by emilyw at 1:51 AM on May 15, 2015 [5 favorites]

emilyw has it. Fast food places aren't tallying up the cost of their ingredients for each menu item, adding a percentage for overhead and profit, and putting those prices up on the menu. Rather, they set their prices based on an attempt to maximize profit based on their customers' willingness to pay for certain items. Some items (say, drinks) may have a huge profit margin, while others (say, some dollar menu items) may net the store a few pennies after overhead.

That willingness to pay will vary dramatically depending on the customers, the market served, and local competition.
posted by zachlipton at 2:10 AM on May 15, 2015

Best answer: I worked in IT for a major sit-down casual dining chain for more years than I care to remember. At one point I was on the team who handled pushing menu and pricing updates to the stores, among other things. The company, which is international, had multiple menus and pricing tiers for different regions (sometimes within the same city), and there are a number of factors that go into it.

Cost of ingredients and how much they have to pay the staff in a given area are large portions of it, but possibly the biggest factor is the general income level of the area and what other options are available. The same hamburger and fries entree you would get in say, Tennessee for $10.99 dollars could cost anywhere from $20-30+ in a more upscale market (Manhattan being the top end of the scale)
posted by skrymir at 4:51 AM on May 15, 2015 [3 favorites]

Price and cost have no real connection. Price is determined by the marketplace, and the market doesn't care about your costs. I paid $27 for 2 cheeseburgers and an order of fries last week at a concert. Obviously, they didn't pay that much more for the beef and potatoes. They do, however, have an exclusive contract in a concert venue with no competition, so they can charge whatever the hell the want.*

*Not really, as sneaking in food or just not eating are both competitors to paying the prices at the venue.
posted by COD at 5:30 AM on May 15, 2015 [1 favorite]

Best answer: "Fast-food restaurants utilize many different pricing tactics, but the most common strategies include value pricing, penetration pricing, customary pricing and bundle pricing."
posted by iviken at 5:48 AM on May 15, 2015

Response by poster: The market may not care about costs, but if costs aren't covered, you won't stay in business long. This is part of why this intrigues me -- and has for a long time. I was a military wife for a lot of years, so I have wondered about this before while traveling, but I never had a convenient place to ask. Then I was reminded dramatically yesterday, thus this ask.

Thanks for the replies.
posted by Michele in California at 6:53 AM on May 15, 2015

FWIW, I order the same thing from the same Burger King in my town and the price has varied by over $3 just due to cashier error/different cash register technique. I can't get them to change it when they decide it's more expensive (and obviously never try to negotiate upwards when it's cheaper).
posted by vegartanipla at 10:10 AM on May 15, 2015

I'm sure this is a very minor part of the pricing structure, but bear in mind that each local municipality has its own taxes. So where one city could a quarter of a percent to each transaction, another city could add three quarters or more.
posted by vignettist at 6:34 PM on May 15, 2015 [1 favorite]

Response by poster: Re cashier error: I am ever so familiar with that. But, the dramatic difference in price made me check my receipt and make sure I hadn't forgotten to order something or that they hadn't overlooked something and the prices were, in fact, substantially different on specific items.
posted by Michele in California at 3:04 PM on May 19, 2015