Pricing: Setting the Right Price margin-based management
Pricing is based on three principles (costs, perceived value, competition) and four categories of methods: cost-plus, perceived value, competitive alignment, and dynamic pricing. Pricing sets a price; pricing drives a decision.
The right price is not universal: it depends on the price elasticity of each SKU, its role in the product lineup, and the legal framework governing promotions. In retail, it is the margin achieved—by SKU and by region—that determines a price, not the listed price.
Pricing is the process of setting, adjusting, and managing a product’s selling price by combining three factors: cost of goods sold, perceived customer value, and competitors’ prices. It is an ongoing decision, the outcome of which is reflected in the margin achieved rather than in the listed price.
This guide reviews pricing methods, the difference between pricing and rate-setting, calculating the fair price based on elasticity, and the specific constraints of retail and mass merchandising: the role of reference prices, legal limits on promotions, and ongoing price comparisons. The simulator below shows in just a few seconds how a price change affects volume, revenue, and margin.
Simplified model based on constant elasticity, excluding promotions, out-of-stock situations, and cross-product effects. The default value (-1.35) is the average elasticity of the French market as reported by NielsenIQ in 2021: replace it with the value for your benchmark.
What is pricing?
Broadly speaking, pricing encompasses two aspects: an analytical discipline (measuring customers’ price sensitivity, simulating scenarios, and comparing the market) and an operational practice (setting prices, monitoring them, and adjusting them). It differs from simply setting a price in three key ways.
It is ongoing. Prices are adjusted in response to changes in demand, purchase costs, and competitive trends—not just once a year. It is differentiated. Not all products in an assortment play the same role and therefore do not warrant the same margin level. It is measured. Without tracking volumes, stockouts, and realized margins, no pricing decision can be validated after the fact.
One principle underlies the rest: the listed price is a business decision, and the resulting margin is the outcome. Confusing the two is the most common mistake, because discounts, off-invoice deductions, and promotions widen the gap between the list price and what the company actually collects. For brief definitions (loss leader, price image, gross margin, back-end margin), the pricing entry in the glossary and the complete pricing glossary bring them all together in one place.
The issue is also more challenging than before, for three interrelated reasons. Purchase costs are fluctuating more rapidly, rendering quarterly pricing grids obsolete. Price comparisons are now instantaneous for customers. And the legal framework has become stricter, reducing the scope for promotional activities. A pricing strategy updated only once a year is no longer viable.
operating income on average for every 1% increase in price at constant volumes, according to a McKinsey analysis of Global 1200 companies.
This is a theoretical order of magnitude: it assumes that demand does not respond to price increases, a supposition that the elasticity—discussed below—specifically qualifies.
Pricing Methods
There is not just one pricing method, but four categories. The first three set a price level, while the fourth manages how that price varies over time.
Cost-plus pricing
You start with the cost of goods sold, add a target markup rate, and arrive at the selling price. The method is simple, easy to justify internally, and ensures profitability on a product-by-product basis (see the definition of cost-plus pricing). Its limitation lies in what it overlooks: what the customer is willing to pay and prevailing market prices. When applied mechanically, it leaves room for profit on products that are not very price-sensitive and results in lost volume on products that are heavily compared.
Value-Based Pricing
Pricing is based on what the customer is willing to pay, regardless of cost. This is the most profitable approach when it can be measured, but it requires testing, willingness-to-pay studies, and detailed customer segmentation, as described by Simon-Kucher. In retail, the challenge is operational: translating insights about value into a pricing grid that can be applied to thousands of SKUs.
Competitor-Based Pricing
We position ourselves relative to market prices: by aligning with them or by intentionally setting prices above or below them. This approach is essential in highly comparable markets, but it assumes that competitors’ prices are known, up-to-date, and comparable in scope. With a product portfolio of 300 items, no one can track this manually, which is why a tool-based strategy for monitoring competitors’ prices is so valuable.
Dynamic Pricing
It adjusts prices over time based on demand, market conditions, or available inventory. It ranges from capacity management (yield management) in transportation and the hospitality industry to the daily adjustment of online prices. In France, price personalization based on customer profiles is subject to regulations (consumer information, GDPR provisions on profiling); as a result, most retailers adjust their prices by region, channel, or store segment, not by individual.
In summary:
| Method | Starting Point | Force | Limit |
|---|---|---|---|
| Surcharge | Cost of Goods Sold + Target Margin | Simple, guaranteed profitability | Ignore the customer and the market |
| Perceived value | Customer's Willingness to Pay | Highest profit margin potential | Complex Measurement and Deployment |
| Competition | Market prices | Price-Image Consistency | Depends on reliable and up-to-date data |
| Dynamics | Demand, Inventories, Context | Responsiveness | Legal framework, detailed oversight |
Pricing or Tarification: What's the Difference?
The two terms are often used interchangeably, but the distinction is important. Pricing refers to the act of setting a rate: a rate schedule, a pricing scale, or a suggested retail price. It is generally static and technical. Pricing encompasses pricing and everything that precedes or follows it: understanding perceived value, measuring price elasticity, monitoring competitors’ prices, category-level decision-making, and assessing the impact on margins. In other words, setting a price results in a price, while pricing results in a decision.
| Criterion | Pricing | Pricing |
|---|---|---|
| Subject | Set a price | Determining a price level and managing it |
| Rhythm | On time, for the schedule review | Continuous |
| Data Used | Costs, Fee Schedules | Costs, elasticity, competitors' prices, sales |
| Question asked | What rate should be applied? | What profit margin does this price allow for? |
| Result | A price list | A decision that has been followed over time |
In a retail chain, pricing is often determined by the purchasing department (supplier rates, transfer prices), while pricing strategy is generally the responsibility of the sales and merchandising departments.
The Equilibrium Price and Price Elasticity
The right price is the price that maximizes a product’s contribution, taking into account its price sensitivity, its role in the product assortment, and the retailer’s competitive position. It is not a universal psychological price: the €9.99 threshold works for certain categories but has no effect on others. The right price is a local optimum, and it shifts.
To understand this, the key concept isprice elasticity: the percentage change in volume resulting from a 1% change in price. A product with an elasticity between 0 and -1 responds positively to a price increase: revenue rises even if volume falls. If the elasticity is greater than -1, a price increase causes revenue to decline.
Two statistical figures that should not be compared without considering their scope:
- INSEE measured an average price elasticity of -0.6 for food products sold at Casino Group stores between 2021 and 2022 (based on an analysis of 1.4 billion receipts): a 1% increase in price resulted in a 0.6% decrease in quantities sold. This varies by product (bread -0.49, beer -0.72, wine -1.02).
- In an analysis published in December 2021, at the height of the health crisis, NielsenIQ estimated the average price elasticity of the French market at -1.35, which it described as fairly moderate.
shopping spending for an average 1% increase in food prices at Casino stores between 2021 and 2022 (INSEE).
The discrepancy between the two figures stems from the scope (a single retailer’s food sales versus the entire market), the time period, and the methodology. Above all, it serves as a reminder that an average does not drive anything: it is the price elasticity of each individual product that matters. The calculation, thresholds, and methodological pitfalls (promotions, out-of-stock situations, net prices) are detailed in our article on price elasticity, and the simulator at the top of the page allows you to test these values using your own data.
Pricing in Retail and Mass Merchandising
This is where theory meets real-world complexity: tens of thousands of SKUs, stockouts, legally regulated promotions, and a price image that must be maintained in each specific area.
Every reference has a role
A product assortment is managed by role. KVI (key value items) are the benchmark products that customers mentally compare across different retailers: their prices send a much strongerprice-image signal than the average price of the assortment. Next come destination products, margin products, and complementary products. Applying the same margin rule to all four of these categories will inevitably compromise either the price image or profitability.
A legal framework that limits promotions
The framework established by the Egalim laws was extended and expanded by the Descrozaille Law (Egalim 3, Law of March 30, 2023): as of March 1, 2024, it also covers hygiene, cleaning, and beauty products. Promotional discounts are capped at 34% of value for food products (40% for drugstore, perfume, and hygiene products) and at 25% by volume. These rules, along with the 10% increase in the threshold for selling below cost on food products, have been extended through April 15, 2028.
a value-based cap on food promotions, with a 25% volume cap on all fast-moving consumer goods, effective through April 15, 2028.
In practical terms, a promotional campaign is no longer based solely on the desired discount rate; it is calculated based on the remaining margin after the legal cap. This is the realm of promotional management and the issue of genuine, compliant discounts, which we address in our article on Black Friday in retail.
A Constant Comparison
Price comparison sites, automated competitor price tracking, and consumer reports make a price discrepancy visible within a few hours, not a few weeks. A retailer that discovers a price-image gap during its monthly price check finds out too late.
Omnichannel and Scale
The same product is sold in-store, via curbside pickup, and online, each with different distribution costs. A single price across all three channels can erode margins in one channel and damage the price image in another: retail pricing requires channel-specific rules, not a single pricing grid applied across the board. And managing tens of thousands of SKUs across multiple regions and store formats cannot be done in a spreadsheet. Product assortment segmentation and customer segmentation thus become the two key structural levers.
The Most Common Pricing Mistakes
There are six mistakes that crop up almost everywhere. They often occur together, and none of them are reflected in the listed price.
- Think in terms of the listed price rather than the actual margin. After discounts, off-invoice deductions, and promotions, the price actually received may be very different from the list price. In a case study published by McKinsey (involving a lighting manufacturer), 16.3 percentage points of revenue were lost through off-invoice deductions.
- Apply a uniform margin rate. Applying the same rate to both a KVI and a complementary product does not protect either the price image or the margin.
- Ignore elasticity. A uniform price increase on highly sensitive items often produces the opposite effect of what is expected.
- Monitoring competitors' prices too slowly. A monthly report reflects the past, not today's market.
- Making decisions without taking the legal framework into account. A promotional plan that does not comply with the law can lead to a renegotiation of the commercial terms or even a legal dispute.
- Don't just look at the average. A stable overall margin can mask categories that are struggling and others that are outperforming.
For more on this topic, see " Common Pricing Strategy Mistakes in Retail and E-Commerce."
Managing Pricing Based on Margin
The sequence that works consists of five steps.
- Map out the roles. Categorize the product assortment by function: KVI, target market, margin, and complementary items.
- Measure sensitivity. Calculate elasticity by product category and by region, controlling for promotions and out-of-stock situations.
- Compare the market. Continuously monitor competitors’ prices for high-traffic products.
- Simulate. Evaluate each scenario in terms of volume, revenue, and margin—not just the listed price.
- Decide and follow through. Implement by area, measure the gap between the expected result and the actual result, and make corrections.
This process (competitive intelligence, sales forecasting, margin management) is what Booper’s modular MPS pricing solution automates for retailers. The goal is not to align prices but to manage margins by SKU, by region, and by time period. To choose a tool, our comparison of retail pricing software and the definition of a pricing tool provide the criteria; the guide to calculating gross margin lays out the calculation basics.
An expert's opinion on three practical issues
Three questions for Fabrice Decroo, Director of Consulting at Booper, on topics that frequently come up in meetings with retailers.
Commentary by Fabrice Decroo, Director of Consulting at Booper
What price discrepancy triggers a consumer alert on a KVI?
There is no legal threshold or universal rule. What triggers the perception of a discrepancy is the frequency of purchase and the visibility of the price: for a product bought every week, even a few percentage points of discrepancy observed on the shelf can be enough to cast doubt on the price image, whereas such discrepancies go unnoticed for an occasional purchase. Best practice is to set, for each KVI category, a target variance and an alert threshold that must not be exceeded, based on a recent survey.
How can you isolate the price effect from the promotional effect in a measured elasticity?
In the model, we separate the two: the historical data is restated to distinguish the regular price from the promotional price, and we add variables for the promotion itself (prominent placement, flyers, time period) and for out-of-stock situations. The elasticity at the regular price is then calculated excluding the promotion, and the promotional effect is measured separately, relative to expected sales without the promotion. Without this restatement, elasticity measured during promotional periods is generally overestimated.
What legal limit under Egalim 3 actually blocked your promotional plans?
In the food sector, it is the volume cap (25%) that places the greatest constraint on planning: it limits the share of sales for a specific product sold as part of a promotion, regardless of how attractive the promotion is. The value cap (34% for food, 40% for personal care and household products), on the other hand, limits the discount granted on each offer. Our advice: build the promotional calendar on an annual basis, product by product, and calculate the remaining margin after the cap is applied before approving a promotion.
Frequently Asked Questions About Pricing
Pricing sets a rate: a rate schedule, a pricing scale, or a suggested price. Pricing encompasses rate setting, measuring price elasticity, monitoring the competition, and category-based arbitrage. The former is static and technical; the latter is an ongoing decision-making process.
Four pricing models: cost-plus, value-based pricing, competitive pricing, and dynamic pricing, which adjusts prices over time.
This is the price that maximizes a product’s contribution, taking into account its price elasticity, its role in the product lineup, and the retailer’s market position. It is calculated by category and by region, never as an overall average.
Because the actual amount received depends on rebates, off-invoice deductions, and promotions governed by law. McKinsey documented a case (a lighting manufacturer) in which 16.3 percentage points of revenue were deducted off-invoice.
Adjusting prices over time is legal. However, tailoring prices based on a customer’s profile is governed by consumer law (consumer information) and the GDPR. In practice, retailers set prices by region, channel, or store segment.
By adjusting pricing strategies: aligning KPIs with the market, raising prices where price elasticity is low, and eliminating unjustified discounts. The stakes are high: according to McKinsey, a 1% price increase at constant volumes represents, on average, an 11% increase in operating profit for Global 1200 companies.
Sources: McKinsey, *The Power of Pricing* · INSEE, price sensitivity of purchases · NielsenIQ, managing pricing policies in an inflationary environment · Service-Public Entreprendre, regulations on promotions · economie.gouv.fr, promotions and the Egalim Act · Racine, extension of regulations on promotions and the SRP+10 until 2028 · Simon-Kucher, value-based pricing · Wikipedia, cost-plus pricing.
Pricing is based on three principles (costs, perceived value, competition) and four categories of methods: cost-plus, perceived value, competitive alignment, and dynamic pricing. Pricing sets a price; pricing drives a decision.
The right price is not universal: it depends on the price elasticity of each SKU, its role in the product lineup, and the legal framework governing promotions. In retail, it is the margin achieved—by SKU and by region—that determines a price, not the listed price.
Since May 28, 2022, the crossed-out price in a promotion must correspond to the lowest price actually charged during the previous 30 days, not to a price that was artificially inflated the day before the sale. A simple rule on paper, but one that is regularly circumvented in practice: during Black Friday 2025, UFC-Que Choisir once again called out several major retailers for discounts deemed misleading.
This guide is based on two key observations—strict regulations and increasingly wary consumers—to address a practical question: How can a retailer design a Black Friday campaign that protects its profit margin without risking an audit by the DGCCRF or damaging its brand image? A 5-step method, backed by verified data. Ensuring compliance across all promotional activities is the purpose of BOOPER’s Promotion Management module.
A PIM can store, enrich, and distribute a price. It generally cannot determine whether that price is the right one: price elasticity, competition, cannibalization, and impact simulation fall outside its scope.
The two tools complement each other rather than replace one another: PIM ensures the reliability of product data, while a dedicated pricing solution transforms that data into simulated and governed pricing decisions.
This decision-making governance is what BOOPER’s Operational Pricing Consulting module provides: ensuring that the right people approve the right things, beyond simply calculating prices.