The Economist famously publishes the Big Mac index to illustrate purchasing power. Their dataset can also be used to reverse-engineer McDonald’s pricing strategy. Our example demonstrates the usefulness of the Canback Global Price Calculator.
As discussed in our post ‘The Canback Global Price Calculator‘, a multinational company can base the price for its products in a given country on a global view, a local view, or a mix of the two. We find that McDonald’s prices the Big Mac based on a 58% local / 42% global price mix. This explains 74% of the variance of Big Mac prices around the world (R-square).
Note that we don’t know how McDonald’s makes its strategic pricing decisions. Perhaps it is with an explicit method; more likely it is the implicit outcome of multifaceted considerations.
Here is how we calculated the 58% / 42% mix:
- We downloaded the dataset from the Economist. It contains 55 countries with Big Mac prices in local currency. We excluded Venezuela because of exchange rate issues.
- If a uniform global prices applied in every country, then the local price would be exactly $4.79 (= US price in the dataset) converted into local currency at today’s exchange rate. If you look at the dataset you will see that this is not the case.
- If the price in each country was based on local purchasing power, then the Big Mac price would be the global price times a price level adjustment. This price level adjustment is available from the World Bank’s International Comparison Program, 2011 Round. It takes some mathematics to adjust it from 2011 till today, which we have done. We find that a local pricing strategy explains Big Mac prices better than the global approach, but maybe we can do better.
- Thus, we tested various mixes of global and local prices and find an optimum at 58% local, 42% global. The screenshot below from Stata shows the results.
If you want to test the Canback Global Price Calculator on the Big Mac to find a reasonable price in a new country, you simply set the source country to the United States and the price to $4.79, pick your target country, set the price mix to 0.58, and the price is calculated.
The same applies to any other product or service. We use exactly the same method to price our consulting services by country (the local/global mix being our secret).
The analysis was done on April 6, 2015.
Here are links to the datasets: