Pricing lessons from a $2.9M cup of coffee

So today i'm going to tell you the story about Stella Liebeck and mcdonald's and how we can learn something about pricing from this 2.9 million dollar cup of coffee. So back in 1994 a lady called Stella Liebeck, drove up to mcdonald's drive-through with her grandson, they bought a cup of coffee and drove to the nearby parking space to put in their milk and sugar so that she could drink her coffee.

As she tried to prise open the lid this boiling hot cup of coffee went all over her lap giving her third degree burns as you can imagine it must have been such a painful process for her to undergo. She had to go to hospital she had skin drafts and racked up over $11,000 in medical bills as a result of this traumatic experience with this cup of coffee bought for 49 cents from mcdonald's. Clearly stella was in a bad place and given the medical bills she racked up she engaged a lawyer to seek compensation from mcdonald's for the pain and suffering that she went through.

She asked for compensation of $20,000 Mcdonald's came back with a buzz off kind of go away offer of just $800, clearly Stella wasn't happy with this and nor was her lawyer S. Reed Morgan, he was called and he'd studied other precedents in this area and he then put a case together to Mcdonald's which went to court. What happened next was simply astonishing, following  S. Reed Morgan'spresentation of Stella's case to the jury during this trial the jury awarded a phenomenal 2.9 million dollars to Stella just under a £200,000 of punitive damages and $2.7 million  of compensatory damages for the ordeal that she went through.

Now you must be wondering how on earth did he manage to get such a high reward from the jury for this incident involving Stella with this cup of coffee that she bought for 49 cents, this award shocked the world and behavioral economics have studied it ever since. There was some interesting lessons taken from it that are now taught in the world of pricing psychology. So what did S. Reed Morgan do to obtain this reward? Well, what S. Reed Morgan did is use the concept of anchoring, where a number is placed in front of human beings in their short-term memory, no matter what that number is we now know that any number that we are given immediately before making a buying decision has an impact upon our assessment of that price or whatever it is that's presented to us.

What S. Reed Morgan did when they were talking to the jury and presenting the case was to say that what Stella went through was deeply tragic. Now it would be reasonable for Mcdonald's two give Stella an award amounting to just one or two days of their worldwide coffee sales, daily coffee sales worldwide by Mcdonald's amounted to $1.35 million and therefore, two days came to that $2.7 million award that she was eventually given. You might be wondering why on earth did he use worldwide coffee sales, why not use coffee sales in just the united states or just the coffee sales in Albuquerque New Mexico where Stella lived, and went to the Mcdonald's, why not just the sales of that particular branch or even just the particular sales of coffee on that day in that particular branch? Thing is they were going for a big number and they needed an anchor and it goes to show that the concept of anchoring is so powerful that any number given to us prior to making a pricing decision has an impact on how we make that decision.