aus Case 19 Pricing Almost Destroys and Then Saves a Local Restaurant "As I pulled into the gravel parking lot I knew immediately that the Mexicatessen was a warm, friendly Mexican restaurant. There was nothing new here, and I don't mean that in a negative way. Nothing looked new but it all looked comfortable. well worn with the passage of time. The front entrance is laden with business cards stapled over the last 30 years. A World War Il photo of the owner adorns one wall and Mexican motifs line the walls and ceiling right next to the window air condi- tioners. Somehow this all looked familiar, although I knew I had never been to the Mexicatessan before." This is how Sally Bernstein, the restaurant reviewer for the Houston Post, de- scribed the Mexicatessan in an article celebrating the restaurant's thirtieth birth- day. Mr. and Mrs. Herrera established the Mexicatessan in 1957. The restaurant, located in a lower-middle-class neighborhood, attracts both locals and Houston's rich and famous. In the early 1980s, the restaurant's profitability started to drop. Herrera worked long, hard hours producing a high-quality product that his custom ers enjoyed, but he received very little reward for his time and investment. He had a good product, a good location, and a strong following. The problem was pricing The prices at the Mexicatessan were far below those of the competition. Herrera wanted to offer good value, and he felt that he had to keep his prices below the chains. He used price to gain a competitive advantage against the chain's expensive Instead of attracting and maintaining loyal customers, the Mexicatessan's low prices almost destroyed the business. The prices were not high enough to produce buildings and their large regional advertising budgets. sufficient cash flow to keep the restaurant in good repair. Herrern was unable to receive financial reward for his efforts. After several years of struggling, the owner commissioned a research project to see how he could increase his cash flow. The re search suggested that his prices were 50 percent less than those of the competition, increase his prices so they were only 10 percent less than the competition. He felt 111 o Case Studies this price difference and his food quality would offset the competitive advantago of the chains. He set out to achieve his story through a series of planned price Increase. Because achieving his tragot would mean price increases of 70 percenter more on some items, the first price increase was about 25 percent, with subsequent price increases gradually moving him to his desired pricing levels. Over three you period from 1962 to 1965, the menu prices increased by 40 to 70 percent. This w a bold move at a time when Houston was in the middle of a decade-longreso After the price increases the Mexicatessan's revenues increased at a higher percentage than the price increases indicating there was little resistance to the price increases Herrera's customers still thought they were getting good value. The prio increase allowed him to put a new roof on the building, hire additional stall, decorate the restaurants interior and receive a good return on his investment. The case study demonstrates the importance of price. Operations that charge too little often do not have money to maintain the business, although they have many cus tomers and appear prosperous Horreta was lucky. It is easier to move up the price of a product that is under priced than it is to lower the price of an overpriced product. Companies that over charge create a negative de among those who have tried their products. Even when peoes are lowed costos attitudes may remain unchanged. Pricingust be carefully planned angement process - DISCUSSION QUESTIONS 1. Why was Mr. Herrera reluctant to raise his prices? How 2. Using this case as an example, aplain how the con did these low prices almost destroy the business? cepts of demand price and profits are interested canned by CamScanner