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The Value Proposition of Thinking in Round Numbers

You may recall a recent post where I talked about top ten lists . There is a much greater perceived difference between #10 and #11 on a “Best of” list than between #3 and #4 or #12 and #13. The reason is that we have a specific mental schema of the top ten (smaller but similar effects for the top 5 or top 20). We remember which options are in the top ten, but the specific order is not as well recalled. So we may forget which was #8 and which was #9. But we do remember that option X was in the top 10 or not in the top 10.

Long lists of ranked items, such as Bloomberg Businessweek’s rankings of MBA programs, are ubiquitous in Western culture, and they are often used in consumer decision making. Six studies show that consumers mentally subdivide ranked lists into a smaller set of categories and exaggerate differences between consecutive items adjacent to category boundaries.

So that brings me to today’s topic, the Dollar Menu. We see these are many fast food restaurants. But it turns out, it was a big mistake to create these. It was inevitable that inflation would make anything in this category as a losing proposition for the restaurant. We saw the serving size get smaller and smaller, but there is only so far that can take us. But the restaurants found themselves unable to change the menu to the “Dollar and ten cents menu.” The round number of the Dollar had created a strong mental schema of the value proposition that a dollar ten just couldn’t match. It just smacked the customer in the face with the price increase. A “Two Dollar” menu would also be a nice round number, but it is too great a price increase to justify with inflation that has been running just a percent or two for years.

My Take

I learned about just how problematic this has been in the December issue of Fortune Magazine, which had a feature article about McDonalds. The article covered many of McDonald’s recent travails, and the Dollar menu is one of them. They tried adding an “Extra Value Menu” but customers noticed that everything was priced more than a dollar. Sitting next to the Dollar Menu, it caused cognitive dissonance. So they tried recombining the items and calling the whole thing the “Dollar Menu & More” but all that did was highlight that some of the items were more than a dollar, and not a round number either. It wasn’t just confusing, but it broke a simple mental model of the restaurant’s pricing.

This might seem trivial, but it really hurt sales. Marketing experts are pretty insistent that companies need to have a clear value proposition and these changes made McDonalds pricing too ambiguous. On the other hand, I can’t think of a better idea except to invent a time machine and convince the previous management not to launch anything called a “Dollar Menu” in the first place. Start off with “Extra Value” menu would have been fine.

Your Turn

What do you think? Do you eat at McDonalds? Did you experience any dissonance when the Dollar Menu went through these changes or did you never even notice? Do you have a suggestion now that we have the Dollar schema etched into our minds?

Image credit: Victoria Henderson

4 thoughts on “The Value Proposition of Thinking in Round Numbers”

  1. The image of a dollar menu is such engraved in our minds that any change (increase) to the cost is immediately noticed and leads us to think that if we are going to pay more than a dollar why not pay even more and get those other burgers or rather not pay at all and dine somewhere else where there hasn’t been a price rise. What the McD team can do is go on decreasing the size of serving of dollar menu but it can only go upto a point beyond which it will start hurting the sales a lot. You can not remove the dollar menu altogether so that the customers can focus more on other products. It just has to be there. Meanwhile they can increase the prices of other items to counterbalance their profits from the dollar menu.

  2. Very interesting.

    It seems to me, however, that creating any list where the perceived value is based on the price being $1 is always going to cause an issue down the road. If they had called the “Dollar Menu” something else, say “The Value Menu,” the argument can be made that the same problem would have occurred. Customers would make the connection between the items and $1, regardless, and become accustomed to it. The trick is to communicate the VALUE of the product in relation to the next best alternative, which in most cases is another item on the menu.

    In my opinion, McDonald’s needs to just make a decision instead of trying a new approach, only to back off a few months later. What’s the harm in calling it the “Dollar Menu” even if items are not all a dollar (as long as the lead with a $1.xx)? There are plenty of successful businesses who take this approach (i.e. Dollar General, Family Dollar, etc.).

    Sometimes the best thing you can do is to simply make a decision.

  3. Marc,

    Uv heard similar comments on the categorical chunking of ranked lists and the artificial skewing/separation of adjacent positions in cog psychology research before, I’d be interested in seeing the studies you were referencing above.

  4. There is a long history of this kind of anchoring… but organizations seem to survive it. Woolworths was established as a “five and dime” store. Super 8 motel was opened in 1974 and the original room rate was $8.88, hence the numeric brand name. Similarly, Motel 6 started in 1962 with a $6 rate. Dollar Tree has shaken loose of this and I anticipate “Five Below” will as well. These mnemonic devices are used by marketers precisely because they are potent anchors (and they are successful at it). They just need to strategize an “exit strategy” a priori to transition gracefully as inflation or market forces dictate. For all of the headaches and perils of dealing with the inevitable maturation beyond these anchoring-based marketing schemes, one must acknowledge that they are powerful. Consider the real possibility McDonalds may not have held onto their market share this long had they not had the dollar menu.

    P.S. Dropping the word “dollar” altogether and just calling it a “value menu” at this point may be a more graceful exit.

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