Case Study: 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. Mexican motifs line the walls and ceiling right next to the window air conditioners.”
The restaurant, located in a lower-middle-class neighborhood, attracts both locals and
Houston’s rich and famous. The restaurant’s profitability started to drop. The owner, Mr. Herrera,
worked long, hard hours producing a high-quality product that his customers 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 Mexicatessen 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 buildings and their
large regional advertising budgets. Instead of attracting and maintaining loyal customers, the
Mexicatessen’s low prices almost destroyed the business. The prices were not high enough to produce
sufficient cash flow to keep the restaurant in good repair. Herrera 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 research suggested that his prices were 50 percent less
than those of the competition, even though his customers thought the food quality was better.
Herrera decided to increase his prices so they were only 10 percent less than the competition. He felt
this price difference and his food quality would offset the competitive advantages of the chains. He
set out to achieve his strategy through a series of planned price increases.
This was a bold move. After the price increases, the Mexicatessen’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 price increases allowed him to put a
new roof on the building, hire additional staff, decorate the restaurant’s interior, and receive a good
return on his investment.
This case study demonstrates the importance of price. Operations that charge too little often do
not have money to maintain the business.
Questions for Discussion
1. Why was Mr. Herrera reluctant to raise his prices?
2. How did these low prices almost destroy the business?
3. Using this case as an example, explain how the concepts of demand, price, and profits are
interrelated