Double Pie Profit

McDonald's sign

On my bi-annual visit to McDonald’s the other day I noticed this sign posted on the drive-thru window: “Two Apple Pies: $1. One Apple Pie: $0.95.” The first thought that crossed my mind was: Is it possible to deduce the actual cost of a single pie from this data? On the lower end of the scale it can be only 5 cents – in which case they make a huge profit on the first one, and sell the second one at cost. On the higher end it could be 50 cents, earning them a large margin on single pie sales but none on doubles. If many customers buy singles, they strike gold. However, it’s almost totally irrational to buy only one when the second one is only 5 cents more, so let’s assume that almost all customers buy two. So why does McDonald’s part with their precious pies in pairs? Probably because this is a good way to move inventory and make good profit. Let’s see how.

There must be enough irrational, diet conscious, or reading-challenged people to guarantee a large percentage of single-pie purchases. Let’s estimate this number at 20%. Even at the high end of the cost curve, at 50 cents, this would guarantee a 9 cent average margin. Assuming a lower cost of, say, 30 cents, the margin soars to 45 cents on average. Pretty nice! If you compound the psychological effect making people buy more because this deal is “too good to pass on”, I bet this store is making loads of money.

The way the sign looks, this is a local initiative and not centrally mandated policy. If the profit margins are indeed so high, they should seriously consider offering this deal chain-wide.