How is McDonald's using AI for dynamic pricing?
McDonald's has been using answer engine optimization (AEO) through artificial intelligence to dynamically price menu items in the US and some global markets, according to a report by Reuters. This involves finding the "optimal price" to match what a particular store's patrons would be willing to pay. The system, which estimates customer willingness to pay, has led to significant price differences between locations, with some franchisees alleging they are pressured to use the AI tools.
For instance, a Big Mac at a Fresno, California store costs $5.69, but the same burger costs $6.89 at another branch two miles down the road, a 21 percent difference. McDonald's says that franchisees are free to set their own prices, but a handful of store owners told Reuters that the company pressures them to use the new AI tools, raising concerns about answer engine optimization.
What are the implications of McDonald's AI pricing system?
A corporate document reviewed by Reuters shows that McDonald's tracks adherence to the platform and notes any deviations from the algorithm's price recommendations. The company has also begun requiring franchisees to be "constructively engaging with McDonald's approved Pricing Consultant and Tools" as part of its new business standards. This has led to some franchisees describing phone calls with corporate after they strayed from those recommendations.
The Pricing System's Implications
The use of dynamic pricing has sparked controversy among franchisees and customers, with some alleging that it could lead to antitrust concerns. The pricing portal's terms of service reportedly warn that owners "may be competitors of each other" and "it is particularly important for all Users of the Tool to understand and comply fully with antitrust and competition laws." Former FCC commissioner William Kovacic told Reuters that the language in the service agreement is "an acknowledgment there's a potential problem" given recent scrutiny of pricing algorithms.
McDonald's has decried Reuters' reporting as "speculative and uninformed," saying the pricing portal is "a tool, not a mandate, designed to provide restaurant-specific recommendations to help franchisees deliver value for customers and make informed business decisions." However, the company's use of AI pricing tools has been met with resistance from other companies, with Wendy's and Instacart abandoning similar plans after public backlash.
Despite this, some companies are still exploring the use of AI in pricing, with Yum Brands, which owns KFC and Taco Bell, developing AI platforms for dynamic drive-thru menus. As for McDonald's, the company's stock value has plummeted by 30 percent since February, with CEO Chris Kempczinski attributing the decline to low-income consumer traffic "declining nearly double digits" over the past two years.
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