Wendy’s is not a company that gets a whole lot of attention simply because it has played fourth fiddle to Dairy Queen, Hardee’s, Burger King, and the star of the show, McDonald’s. With McDonalds growing profits and dividends like clockwork around the globe every year, and being the one source of truly lucrative long-term wealth creation within the fast food industry, it can be easy to overlook some of the contributions to human understanding brought about by some of the secondary players.
Today, I want to shine a quick spotlight on a strategy employed by Dave Thomas, the founder of Wendy’s. From the beginning, Thomas had to work cut out for him—when he opened his first Wendy’s in Columbus, Ohio back in 1969, there were already over a thousand McDonald’s franchises dotting the American landscape. But Dave Thomas was no stranger to uphill battles—he never knew his parents, his adoptive mother died at the age of five, and Dave had trouble keeping up with his adoptive father (who had worked his way through four different wives by the time Dave dropped out during his sophomore year of high school).
To make inroads on the McDonalds goliath, Dave focused on quality. The reason why someone would go to Wendy’s over Burger King or McDonalds back in the 1970s and 1980s was because Thomas was buying expensive lamps at Tiffany’s and putting them in the franchises he owned, installing expensive carpeting, and buying high-end chairs that were about to be discontinued by their manufacturer. This even carried over into Wendy’s advertising campaigns titled, “Where’s the beef?” in which Dave Thomas sought to steal market share from Burger King and McDonalds by claiming that Wendy’s used much higher-quality beef sources for its hamburgers than its larger counterparts that were trying to cut costs.
This strategy largely worked until Thomas stepped aside from running the company in 1982. With Thomas out of the picture, the Wendy’s management began to focus on increasing its profits by lowering the ingredients costs and neglecting the management of the stores. All of the market share gains against Burger King and McDonald’s disappeared as Wendy’s found itself being less profitable in 1992 than it was in 1982 when Dave Thomas stepped aside.
Desperate to make a comeback, Wendy’s management sought the counsel of the legendary founder, who still owned over 7% of the Wendy’s stock and had begun dividing his franchise interests among his family members.
When asked for some ideas about how to boost sales, Dave Thomas took advantage of basic psychological quirks in how humans view things to increase prices. For instance, Wendy’s had recently begun marketing its double cheeseburger, and was having trouble getting customers to buy it. Thomas recognized the psychological effects that were at work, deterring sales: most people were hesitant to buy double cheeseburgers because they would feel like fat blobs doing so. That is why Dave Thomas suggested this: add a triple cheeseburger to the menu at a much higher price than the single and double cheeseburger, and it will stimulate demand for the double cheeseburger.
If you look at a menu and see a single cheeseburger for $0.99 and a double cheeseburger for $1.49, you might be inclined to get the single cheeseburger. But if you see a menu that says: $0.99 cheeseburger, $1.29 double cheeseburger, and $2.29 for a triple cheeseburger, you are going to boost the sales of the double cheeseburger above where they would have been otherwise. By shortening the pricing gap between the single and double cheeseburger and including a triple cheeseburger as a “dummy alternative” that did not really have much of an intent of selling, Thomas was able to take advantage of basic psychological forces to boost sales.
It was a brilliant maneuver that is still practiced at some Wendy’s to this day. If you ever find yourself in a Wendy’s restaurant, take a good look at the pricing on the menu: the items won’t necessarily all appear to be priced intuitively as you might expect. Rather, there are incentives in place to make certain priced products jump out you because they are such an obvious deal. Usually, it is a structure to entice you to purchase something that is a level up beyond the medium. Thomas was brilliant at understanding the psychological dynamics at play when he came up with “dummy items” and tightened pricing between certain items on the Wendy’s menu. Even though Wendy’s never managed to slay the McDonald’s goliath, there is a lot to learn from the life of Dave Thomas.
Originally posted 2014-01-07 17:16:57.