Economists: what Is McDonalds Doing here?

Recently, i went to a local McDonald’s for coffee-I noticed their new coffee pricing policy-every size is the same price ($0.99).
Is this a smart move? By not tying the retail price to the size of the cup, they seem to be realizing some efficiencies-and saving time. But it struck me that coffee is a high-profit item, and the cost of the cup, creme , sugar, etc., is probably much more than the coffee itself.
So, is there a name for such a pricing policy? It is like the "unlimited’ cup of coffee-99% of people only drink one, so the restaurant loses little by offering what seems to be a dirt-cheap product.
I wonder if this kind of pricing could be applied to other products.

McDonald’s cost of a large (note, Starbucks, “Large”) cup of coffee is the same as a small (“Small”). So by pricing them all the same, they’re just forgoing the extra profit from the larger sizes, and still making plenty on the deal, and making a pretty good pile of marketing and customer satisfaction hay besides.

That is, it’s not like they’re losing money by giving away the large at the small price.

Yes, cost-wise, there is likely very little difference to McDonald’s between a small and a large coffee.

In addition to what AB said, giving people the impression they’re getting a bargain can be a good way to get them to buy your stuff.

By making it so that more people drop by to get their morning, lunch and night shift coffee, more will buy other stuff. It’s similar to a loss leader except that it’s unlikely that a large coffee costs McDo a dollar to make. So it’s more of a lower-margin-than-usual-on-this-product leader.

Another benefit of schemes like this is the free word of mouth advertising that it generates. My cite is this thread.

I’ll bet many people who are used to putting one creamer and/or sugar in their coffee won’t put more in a larger cup, so that cost is the same. The cost of the cup is the same, and the water is virtually the same.

So let’s say McD’s is getting 20 large cups out of a pound instead of 40 small ones. Here’s one wholesaler pricing its cheap coffee at $9.35/lb. (you can be damn sure McD’s pays a lot less than that.) That’s less than 47 cents per cup, so their profit margins are still generous.

As for other products, there’s plenty in that category. Anything that’s “serve yourself” (soda pop, condiments, etc.) Olive Garden’s bread basket and Red Robin’s endless fries, etc.

Breakfast has become a huge portion of eating out. Dunkin Donuts, Tim Horton’s, and every coffee place in existence are catering to that audience. The traditional fast food outlets are lunch and dinner oriented. They are desperately trying to compete in the breakfast hours and keep people in the habit of going to them. Lower-priced coffee is about all McDonald’s can seriously do, but it’s a good strategy. Coffee, not donuts or breakfast sandwiches, is what drives purchasing.

I sometimes wonder if the drinks aren’t just a gimmick to get you to come into the store. I can go to any given fast food restaurant and order fries and a burger, which is only about 20 cents cheaper than just buying the full on combo (fries, burger, and a drink).

The markups on coffee, tea, and soda are gigantic. They’re all 99% water, after all. It’s basically pure profit.

McD’s coffee is better than Starbucks, too. So by giving the customer more of something that is better, they induce them to not only stop there all the time, but to buy other items, thus driving sales and profits.

I think you can get a lot more cups out of a pound of coffee. I think it would be more like 150 per pound. Or more. I looked into a coffee franchise, and a coffee was about 20 cents per cup. And that was some expensive beans. Mickey uses the cheap stuff.

I hate to admit this, but I agree. McDonald’s coffee, while not as good as Wawa’s. is still pretty good.

They’ve been doing the same thing with soft drinks (on and off) for the longest time. Sadly, of the places mentioned in this thread, in my area McDonald’s is the only one that really offers any consistent breakfast food in addition to the coffee. Though I probably like Steak n Shake better for fast food options and I find their coffee tolerable.

The thread has been answered.

To be fair, their Egg McMuffins are awesome. Steak egg McMuffin: Can McDonald's improve on perfection?

The energy needed to run a restaurant icemaker for 17+ hours a day is the biggest cost, followed by the cups, followed by the non-water ingredients. (Keep it in mind next time you think they’re “ripping you off” by filling the cup with ice – it costs them more to do this and they’re just following the beverage companies’ directive on how to produce the best-tasting drink).

I just read an article which said that 7-11’s best seller is their coffee. Maybe that’s who they are looking at?

Starbucks has the premium product, called in marketing a cash cow. McD’s coffee would be termed a ‘dog’ in marketing terms. The saying is to keep the dogs barking at the cash cow so it gives less milk in other words keep your product going for the main purpose of hurting the cash flow of the competitor, so they do not gain a competitive advantage over you.

The other part of this is McD’s does want to be a force in the coffee wars, so along with the above they want more people to try their new and improved coffee, this with a long term shift towards a more ‘grown up’ menu, they need coffee in that category.