Your store’s gross profit is calculated by subtracting the cost of goods sold (COGS) from your revenue. To see your gross profit margin, use this equation:
Your net profit is calculated by subtracting your total expenses from your gross income. To see your net profit margin, use this equation:
Profits don’t just vary by store but by department and even by item. Here’s a breakdown of how different grocery store departments perform:
There are two important terms to know when it comes to pricing formulas: markup and margin.
The two words are sometimes used interchangeably, but a bigger markup doesn’t equal the same profit margin. For example, let’s say you buy cans of soup from your supplier at $3.50 per can and sell them at $5.25. That would be a 50% markup and a 33% margin percentage.
Knowing both calculations will help you ultimately come up with a better pricing strategy.
Markup is used when a retailer wants to earn a fixed amount per item sold. It’s typically used as part of a pricing strategy when offering new products or with products that have very consistent and stable costs.
While very similar to markup, a margin calculation determines the profit margin based on the COGS. Margin is generally used for financial planning and when adjusting prices after getting familiar with your sales data.
Cost-plus pricing is the simplest approach to pricing, which is why it’s both loved and hated among pricing experts. For cost-plus pricing, you simply set the sale price by adding a fixed markup to the cost of goods sold.
Cost-plus pricing is best used for products with stable supplier and ingredient costs or lower-cost items with high stock rotation. If you sell unique items (e.g., homemade deli items) and don’t have something to compare them to, cost-plus pricing is a good way to test the waters and see how they perform.
Cost-plus pricing isn’t a great long-term strategy for many items. While you’re guaranteed a profit, you might undervalue products that customers are willing to pay more for. This method also ignores swings in demand, supply chain disruption, or competitors’ pricing.
Cost-plus pricing is easy to calculate. For example, if you get bags of of chips from a supplier for $2.50 a bag and want to apply a 70% markup, you’ll sell them for $4.25.
$2.50 x (1 + 0.70) = $4.25
Competitive pricing is when you set prices based on your rival businesses. While many companies use this tactic to bring customers into their store with low prices, competitive pricing isn’t always about being the cheapest. If you offer high-quality local food, you may use a competitive pricing strategy to raise your prices instead.
Competitive pricing is often used in the grocery and supermarket industry because many stores carry similar products. Competitive pricing is helpful because it helps you set benchmarks based on other businesses. It also ensures you don’t drastically under or overvalue your products.
Start by identifying your local competitors and doing some market research. Consider things like:
You can also use third-party services like UNFI to assess prices on an industry-wide or regional scale.
When implementing competitive pricing, have a clear and quantifiable goal in mind. Last, remember that while customers are looking for the best deal, that doesn’t always mean having the lowest price tag — so be creative with product bundles and other promotions.
A loss leader is a product that sells for less than its cost in order to sell other, more profitable products and drive foot traffic. Here are some common examples of grocery store loss leaders:
Items could either be consistently kept at a low price or temporarily made a loss leader as part of a product bundle or promotion.
Loss leaders are commonly used in grocery stores because people rarely go into a store for just one item. By selling a few products at a loss, your brand seems more affordable, and it encourages customers to take advantage of the savings by buying other products in the store.
For most grocery stores, loss leaders are used for short-term promotions. Companies like Costco can afford to keep selling their famously cheap $1.50 hot dog and other items for years on end because their business model involves membership fees and large purchases that more than make up for the cost.
Implementing a loss leader strategy requires carefully reviewing your products and looking for items with high demand or ones that naturally lead to other purchases. In other words, you don’t want to sell products at a loss if customers aren’t likely to buy anything else.
Start by trying out a loss leader strategy as part of a holiday sale or planned promotional event, then use the sales data on your point of sale (POS) system to see how it affected average cart size and sales.
Pricing in supermarkets is tricky because produce and many other food items are highly seasonal, perishable, and fluctuate in demand. Variable pricing, also known as dynamic pricing, is when retailers adjust the margins on individual products based on:
Variable pricing is most often implemented in grocery stores to help cut down on food waste and ensure that in-season fruits and vegetables don’t spoil. One common example is when items close to their expiration date get discounted.
Produce prices, in particular, fluctuate throughout the year. Generally speaking, produce has an inverse price to freshness pricing, with lower prices reflecting fresher produce since there’s a higher supply and lower transport costs.
Source: USDA
Variable pricing can also be used to account for seasonal fluctuations, like pricing potatoes, bread, and other high-demand items more competitively around Thanksgiving.
While some larger brands are experimenting with electronic shelf labels (ESLs) that allow them to change prices dynamically throughout the day, you can proactively implement variable pricing on a less granular scale.
Use the historical sales data on your grocery POS system to spot seasonal sales spikes and drop-offs in different departments. This will help you understand which products customers are willing to pay more for in high-demand times and which items they might go to a competitor for instead.
Psychological pricing isn’t a specific pricing strategy, but a tactic that supplements others. It specifically refers to how prices are written out and formatted, and how it affects customer attitudes.
The classic example of psychological pricing is the power of the “.99” at the end of a price. Research backs up what many of us have instinctively felt: buying something at $4.99 simply feels different than buying it at $5.00.
Here are a few other common tactics used in grocery stores:
To a certain extent, you’ll always be using psychological pricing, but it’s not something you should do at random. Supermarkets are constantly adjusting prices by small amounts to provide customers a better sense of value.
Psychological pricing tactics shouldn’t be used randomly. If you constantly change how you display prices, people will catch on and lose trust in your brand. Like all pricing strategies, have a specific goal in mind when making changes, and monitor their effectiveness using your POS system.
Try to think of how certain price points affect the perception of an item. Does placing an item next to others make it seem like a value or premium product? Does dropping the price below a certain number make it seem like a better deal?
Grocery stores have unique pricing challenges that many general retail systems cannot handle. Talk with one of our experts to see how a grocery store POS system enables you to make smarter pricing decisions and improve the shopping experience.
Small grocery stores have many rivals, and some of those rivals are corporate chains that have the resources to undercut you on price every time.
Low prices aren’t everything — so how can you set prices in a way that’s still competitive, doesn’t undervalue your brand, and feels fair to consumers?
When people perceive a store as affordable or premium, they aren’t doing it by looking at an exhaustive list of every product on the shelves. Instead, they perceive a store’s overall prices based on a few select items they buy most frequently.
These key value items (KVIs) typically make up only 15% of overall sales but have a major impact on whether customers see your store as affordable or not. Identifying your store’s KVIs is essential for determining the products your customers are the most price-sensitive about.
To create a KVI list for your store, consider these factors:
Identifying and focusing primarily on a smaller batch of key items gives you an efficient way to influence the value perception of your brand — but remember, KVIs are not static, and you should periodically (quarterly or every six months) re-evaluate your KVI list.
Building a KVI list is useful for more than just pricing strategy. It also helps you understand the preferences of your most loyal customers, which is also helpful when building a product list or making store layout changes.
Grocery store pricing isn’t ubiquitous — prices will vary based on where specific stores are located. If you own multiple locations, you can’t rely on using a single pricing strategy for every store.
Whether you own one store or several, your independent grocery store has to account for local competitors, neighborhood demographics, and customer budgets.
Start with your KVI list and compare the prices of those items against nearby competitors. These will be the items that customers are most sensitive about. If you own multiple locations, do this analysis per zip code you operate in.
However, when looking at other stores, take into account the value perception of your brand. Is your store seen as a high-end organic grocer, or is it more akin to a one-stop shop for basic staples? This will determine the exact businesses you’re competing against and the types of customers you’ll attract.
Defining pricing strategy goes hand in hand with knowing your customers’ shopping preferences. Armed with a solid KVI list and a deeper understanding of where your store fits in the local market, you can use that knowledge to create unique product bundles your customers will love.
Grocery store POS systems allow you to create unique product bundles like holiday gift baskets, chips and dip combos, spice mixes, and more.
Product bundles allow you to:
Here are a few ideas for unique product bundles you can make:
Base your product bundles on what people like best about your store. If they love your locally-sourced meat, create BOGO offers on select cuts. If customers come in for your deli, set up your customer loyalty program to provide a discount on deli items after earning points.
It’s hard to know how your store is performing just by walking the aisles and watching customers.
Tracking key performance indicators (KPIs) gives you an unbiased, bird’s eye view of how your pricing affects the store’s financial health. If you’re using an updated point of sale system, many of these metrics can be tracked automatically. Make smarter pricing decisions by tracking these essential grocery store KPIs:
Prices need to change frequently to account for factors, some of which are predictable and many of which are not.
So, how often should you adjust your pricing? It depends. Some factors, like new tariffs or supply chain disruption, demand a quicker response to avoid significant losses. Others, like competitors changing their prices or new residential construction in your area, might benefit from a slower, more strategic approach.
This is why many grocery stores use scenario planning in their sales forecasting strategy. By having an action plan for various scenarios like price hikes or local population growth, you can improve your reaction time when the unexpected happens.
Here are some common situations where grocery stores might adjust their pricing.
Increases to costs of goods sold (COGS) or supplier pricing
Decreases in costs
Consistent customer feedback about pricing or selection
The biggest challenge in grocery store pricing strategy is a lack of visibility.
When grocery store owners are tracking inventory or calculating profit margins by hand, it gets exponentially harder to proactively adjust pricing and monitor the impact of pricing changes.
This is one of the many reasons grocery stores and food markets are throwing out their traditional cash registers and upgrading to a modern point of sale system. More than just processing payments, a POS system tracks inventory in real time, streamlines purchase orders and supplier management, manages customer loyalty and marketing, and more.
Having all business functions in one place means that a POS system constantly collects data that can be used for better pricing decisions.
Systems built specifically for grocery stores make essential information easy to find and include pre-built dashboards tailored to help store owners optimize profit margins and inventory selection.
Several new technologies, like digital price tags and artificial intelligence (AI), have the potential to reshape how pricing is handled in grocery stores. Though many of these technologies are only being rolled out at big chains, they are worth keeping an eye on to see how customers react.
ESLs reflect prices with a digital display and typically connect to the store’s POS system via Bluetooth. Digital shelf labels are gaining traction among groceries and other retailers lately because they can quickly be updated.
With a digital shelf label, you can update prices instantly instead of over hours or weeks. With no physical labels, it will also cut down on paper waste from manually changing shelf labels or applying discount stickers.
Dynamic pricing models use AI and demand forecasting data to automatically adjust pricing, potentially adjusting prices in real time as competitor prices change or bad weather rolls in.
While some experts have concerns over the potential for grocery stores to implement surge pricing, dynamic pricing tech could also help prevent food waste by automatically adjusting prices for soon-to-expire items.
Larger companies like Amazon are experimenting with smart carts with a display that tallies up groceries as you put them in. This technology has the potential to let customers price their groceries before they get to the checkout.
Additionally, it could dynamically show discounts (like buy one get one offers) or ads for sale items similar to what’s in the cart already.
Customers love a good deal, and customer loyalty technology is making it easier than ever to give them ones they’ll love.
