Retail Price Setting: How to Choose the Right Pricing Strategy for Your Banner

Price setting in grocery retail is a major lever for balancing two essential objectives: strengthening price image to retain customers, and delivering short-term profitability for the banner. These goals often pull in opposite directions—and operate on different time horizons (long-term for price image, short-term for margin performance).

According to a 2025 McKinsey study, consumers have become even more price-sensitive in an inflationary environment. Private-label FMCG products reached a 39.1% value share in 2024, a clear sign that shoppers are increasingly seeking lower-priced alternatives.

This guide, drawing on Mercio’s expertise, breaks down the core principles behind building a balanced and effective retail pricing strategy.

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To discover the exact step-by-step methodology for setting prices in grocery retail, continue reading this guide.

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The Fundamentals of a Balanced Pricing Policy for Retailers

A successful pricing policy strikes the right balance between the consumer perspective (market price image) and retailer imperatives (financial targets).

Below, we share the key considerations for finding this balance when setting retail prices.

Accounting for the Customer View in Retail Pricing: Building Price Image

In retail, price is the most important criterion driving store visits and purchases. Consumers evaluate a product's cost against a reference value, which can be:

• Market prices (comparing with competitors)
• Products in the same need category on the shelf (often comparing private label vs. national brands)
• Historical pricing (comparing current price to past prices)

When setting prices, retailers must consider customer perception. That's why a solid pricing strategy must rest on several key criteria outlined below.

Competitive Positioning

Studying the competition is fundamental when setting retail prices, especially for national brands. That's why competitive alignment is one of the most suitable pricing methods.

However, when using this approach, retailers must ensure they:

• Choose relevant competitors. Will the retailer consider physical stores, pure players, discounters?
• Define the alignment level (e.g., 105% or 90% of competitor price)
• Select which competitor price to use (lowest, most common, average?)

Next, they must choose between national alignment (prices aggregated at national level) or local alignment (prices specific to each store's trade area).

At Mercio, we always recommend local alignment. It's more precise because it accounts for the real alternatives consumers see. The competitor prices to consider are then local prices or, in the absence of local prices, national prices of competitors present in the area.

Finally, retailers must consider the matching rate (coverage), which allows aligning prices of non-identical products (like private labels) using matching links with quantitative coefficients (for volume differences) and qualitative ones (for perceived value differences).

Price Coherence for Products on Shelf in Supermarkets

Ensuring price coherence for products in the same need category is crucial for image. When setting prices, retailers must ensure coherence at national or local level.

National coherence relies on configuring value drivers (such as brand or packaging) to guarantee a price scale respected nationwide.

Local coherence adapts to each store's specifics. In this case, local assortment and pricing result from local competitive alignment.

Whichever level retailers choose, they use what's called coherence intervals. These intervals ensure that a price aligned with competition doesn't create inconsistency with neighboring products on the shelf.

For example: the private label is 20% to 30% cheaper than the national brand. If this interval isn't respected, prices are incoherent, which can damage the brand's price image.

Managing Variation and Rounding

Finally, to build an effective price image, retailers must follow certain variation and rounding rules. These help frame price changes to avoid damaging the store's price image through incomprehensible shifts for customers.

For example, a brand might decide on the following strategy: increase prices by a maximum of 15% and never decrease.

Note that price rounding is a brand identity factor and can be configured to create psychological price points. For example, a rule might be that all prices above €11 must end in .95.

Accounting for Retailer Imperatives in Pricing: Profitability and Legal Compliance

Undeniably, a good pricing strategy rests on a solid price image. However, price management must also guarantee retailers' short-term profitability and respect legal constraints.

Ensuring Profitability Levels for Major Brands

To ensure profitability, retailers apply margin rules (strict or minimum). These margins ensure a target gross margin (in euros or percentage) at product, store, or central level.

Respecting Legal Constraints, Including Food-Related Ones

Retail operates in a highly regulated sector, and companies can't set prices at will. For example, laws like EGalim in France regulate the market. This 2018 Agriculture and Food law governs commercial relationships in the agri-food sector to protect farmers' incomes.

There's also the 2023 Descrozaille law, which aims to correct the imbalance between suppliers and distributors.

Managing Promotional Impact on Pricing

Brands must also pay attention to promotional impact. If they use pricing software, it allows price forcing to manage prices before, during, and after promotional campaigns, ensuring compliance with legal and business constraints.

Building and Refining Retail Product Pricing (Strategies and Segmentation)

Once pricing fundamentals are understood and applied, it's necessary to build and refine this strategy. A complete pricing policy combines and sequences all these rules into pricing strategies.

Rule Sequencing

After defining which pricing rules to apply, retailers must determine the order in which these rules apply. In Mercio, rule order defines strategic priorities, for example:

• Margin first, then competitive alignment. A possible sequence in our pricing tool could ensure target margin first. Only when it's met does it adjust price relative to competitors.
• Competitive alignment first, then coherence intervals. You can ask Mercio to always prioritize market positioning first. Then it checks for shelf incoherence.
• Coherence first, then competitive corridors. On Mercio, some clients prioritize price coherence with the range for less comparable products, then we verify market positioning within a defined interval.

The Cost-Plus Strategy

One of the simplest pricing strategies is Cost Plus. It consists of adding margin to the purchase price (or raw materials) for each unit sold. This method is useful for certain products, like hard-to-compare items, and can rely on local purchasing conditions (different purchase prices per store) to generate different retail prices by location.

Segmentation

When Cost Plus isn't enough, retailers can use segmentation. Indeed, it allows applying different strategies by product.

For example:

• If a brand wants a more aggressive pricing policy for destination products, it can choose Cost Plus for exclusives.
• Conversely, if it wants to give a more premium price image to one of its lines, it can opt for higher prices.

Retailers have several segmentation levels available to refine their pricing strategy:

• Static segmentation: uses existing nomenclature (reuses aisle names, categories, brands...)
• Custom segmentation (also called product tagging): creates ad hoc classification (with tags) independent of ERP nomenclature, offering operational agility
• Dynamic segmentation: uses time-evolving indicators to define strategy scope, applied nationally or locally, such as:
  
  • Top revenue items
  • Top volume items
  • Key value items (KVI)

Store Segmentation for Retail Pricing

Segmentation can go even further. Indeed, retailers can adapt strategy to store-specific characteristics, this is called store segmentation. They can then implement:

• Static segmentation using store nomenclature (format, identifier)
• Custom segmentation, also called store tagging. This groups stores with similar competitive intensity to apply distinct strategies or facilitate A/B testing.

Simulating and Deploying Retail Pricing Strategy (Geo-Pricing and Operationalization)

Once the fundamentals are in place and the pricing strategy is defined, the next step is to simulate and roll it out. This phase is critical and must be handled carefully to ensure the strategy delivers results.

Simulation for Continuous Improvement

Before deploying a pricing strategy, retailers appreciate being able to simulate its impacts. This gives them a global view and limits error risk. They use a simulation engine, like Mercio's, which lets them evolve the strategy by testing new configurations without impacting in-store prices.

Protected and Separate Workspaces

Simulation doesn't happen just anywhere. It needs a separate environment. Good pricing software offers retailers the ability to protect their production environment (called the master), which is the existing pricing system, by creating sandbox environments (simulation spaces). Thus, all spaces are separated, allowing parameter modification and KPI impact comparison (margin, revenue, price index) without breaking real prices.

Local Pricing Simulation: Geo-Pricing

Simulation is crucial for assessing the impact of store-level price personalization. To achieve this, it is often best to focus on local competition, ensuring competitiveness reflects the alternatives consumers actually encounter. A geo-pricing feature is therefore essential for modeling all scenarios.

High-Performance Pricing Software

Major retail chains' catalogs contain millions of SKUs. To simulate scenarios, choosing a high-performance tool is essential. Mercio's pricing platform is optimized to calculate up to 70 million price points in under 4 minutes, enabling fluid and iterative scenario exploration.

Transparency and Quality Control in Retail Pricing

Before launching the pricing strategy, most pricing managers take additional measures to avoid errors. Using software is helpful, but verifying its output is even more important.

Mercio recognizes this and provides pricing managers with a price construction chart that maps the price path step by step, rule by rule. This makes it easy to quickly identify the constraints (such as margin, alignment, or variation) that shaped the final price.

The tool also lets them configure quality alerts (margin control, variation control, upper bound control) to flag recommended prices that don't meet certain criteria, without modifying price calculation.

Applying Prices In-Store

Once simulations and quality control are complete, all that remains is deploying the pricing strategy in-store. This is the critical moment, and ensuring the right price is actually applied in the field is essential. Several tools guarantee this critical step goes smoothly.

Automated Exports

For prices validated in the test environment to be applied, they must be sent to the master. Excellent news: with high-performance pricing software, new recommended prices can be automatically sent to the retailer's IT systems.

Secure Exports

To avoid errors, exports can be conditional on respecting alert rules configured in the previous step. Prices triggering alerts will be blocked and must be reviewed manually. Secure export thus acts as a quality safeguard.

Price Drift Monitoring for Automatic Price Revision

Price or product managers sometimes want to verify proper application of prices recommended by the central office in stores (prices applied in the field), analyze the gap (drift), and evaluate adoption rate. That's why Mercio developed a dedicated module!

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