How to Price for Tariffs
Price Increase, Surcharge, or Absorb the Cost?
Last week, like many other pricers, I was pulled into a series of urgent meetings about how to deal with the 25% tariffs on imports from Mexico and Canada (which were then put on hold) and the 10% tariffs on China (which are now in effect.)
And just in case anyone thought we’d seen the last of tariff pricing for a bit, on Monday we had the announcement of 25% tariffs on all imports of steel and aluminum.
With these, and promises of more tariffs on specific imports coming soon, how should companies deal with tariffs without seeing the cost come out of their profits?
The first step any company must take is to determine what the impact of tariffs will be on their costs.
Do you directly import materials that will be assessed a tariff? If you do not, do your suppliers?
What will the dollar cost of the tariff impact be for your products, what percentage increase in the total cost of your product does that represent, and what percentage is that of the current price of your products?
Once you’ve established the impact the tariffs will have on your margins, you need to think about how your competitors are being affected.
If you and your competitors are all experiencing the same cost increase due to tariffs, you are experiencing a Macro pricing effect.
In this situation, where the entire market is experiencing the same increase in costs, it’s important to signal early and clearly that you will be taking a pricing action to cover the cost increase you are all experiencing. This encourages your competitors to take similar actions. While no one wants to be the only company in the market increasing prices, if all market players know that others are also increasing prices, it becomes easier for all to feel comfortable increasing. Taking pricing leadership by being one of the first companies to announce that you are increasing prices can help keep your industry more profitable for all players and avoid a race to the bottom. (We’ll talk about the type of price increase you should take in more detail shortly.)
If you are buying imported products which will have a tariff applied to them, but your competitors are not, you are in a more difficult situation.
One of the key purposes of tariffs, after all, is to change the balance of costs in a market. If some companies in your industry manufacture their products in China while others manufacture in the US, the new China tariffs will decrease the cost advantage that those importing from China have experienced.
In many cases this increase in costs from tariffs is still not enough to make it worthwhile to change where you manufacture goods. For instance, last week I looked at the costs for a company which operates a factory in Mexico. The proposed 25% tariff on imports from Mexico would have increased their costs by more than $10 million per year. However, moving their manufacturing to the US would have resulted in an increased labor cost of even more than that.
Had the tariff on imports from Mexico gone into effect, they would have had to pass that increased cost on to their customers, resulting in a substantial price increase. And yet competitors who manufactured in Europe or Korea would have experienced no cost increase and thus kept their prices the same and doubtless gained share. Competitors who manufactured in China would have experienced a smaller increase (10% tariff rather than 25%) and thus would have been able to get away with taking a smaller price increase than the company manufacturing in Mexico.
Since the value of each company’s products would remain the same, while changes in cost would force some of them to change prices while allowing others to remain the same, the tariffs would benefit those companies manufacturing in countries without tariffs applied.
We would expect, in a situation like that, that the companies who did not have tariffs applied to them would gain share within the market while the companies that suffered tariffs would lose share.
If you are forced to take a price increase due to tariffs when you know that your competitors will not do so, this is a very good time to remind your customers of value that you deliver to them in areas other than just price: Superior customer service, higher quality products, a product development team that listens to their feedback when designing new products, product design which is delightful. Remind them of whatever it is that makes your company great to work with.
This brings us to the difficult point: How do you increase price?
First, decide what kind of price increase you will take.
The simplest is simply to increase the price by the amount required. If you sold a product last month for $129, after the price increase it becomes $139. Sometimes simpler is better.
Another approach you can take, especially if you think that the tariff may be temporary, is to leave the price the same but apply a surcharge.
In the past I have helped companies implement surcharges to pass on to the customer cost increases which we believed were temporary.
For instance, in 2018 when electronic logging for tuckers became mandatory, the cost of freight increased significantly. I helped a company institute a freight surcharge which passed that increase on to customers. The surcharge was applied at the bottom of the invoice as a percentage of the total invoice amount. We adjusted the freight surcharge each quarter until freight rates stabilized.
In another example, I helped a company with multiple factories in Europe institute an energy surcharge in 2022, when the cost of electricity in Europe increased by several hundred percent due to the energy cost impacts of the war in Ukraine. Again, this was a surcharge applied at the bottom of the invoice, and it was adjusted each quarter until the rates returned to normal levels.
A surcharge can be a very good way to pass on costs which you believe may be temporary. It’s a transparent way of passing on the cost, and it shows the customer a commitment to remove the surcharge when the extra cost goes away.
If you think the cost increase is permanent, or if you want to make it easy to maintain your higher prices even if the cost increase goes away in the future, then simply adjusting the price of your products is the better way to go.
You can also consider more creative approaches to changing price or reducing cost: Decrease the amount of product in a package (sometimes called shrinkflation.) Bundle your products with services or additional products that increase margins. etc.
Once you have decided on the type of price increase you will take, the next essential step is to have clear communication to the customer.
In some cases, it may even make sense to announce that you will be taking a price increase before you announce what that price increase will be. This allows the customer to adjust to the idea that a price increase is coming. Your actual price increase may even seem like a relief when it arrives, if it proves to be less than your customers had feared.
A good pricing communication tells your customers why you are increasing price. It lets them know what the new price will be and when it will go into effect. And it lets the customer know if there are any other alternatives you can give them. For instance, do you have a cheaper line of products they might consider switching to if the cost increase puts their current product out of reach? Or are you able to sell them a similar product made in a different place (at the old price) if they are willing pay for shipping and wait for delivery?
Finally, a good pricing communication should always remind the customer of the value you deliver to them and tell them how much you care about their business.
So, to sum up:
Figure out what the cost impact of the tariffs will be on your products and how much of a price increase you will need to pass that cost on the to the customer
Assess whether your competitors are going to be experiencing the same tariff impact as you or if their supply chain will allow them to avoid the cost
Determine whether you want to pass on the cost as a straight price increase, a temporary surcharge, or some other more creative price or product change
Craft a clear communication to the customer explaining the reason for the price increase, reminding them of your value and your desire for their business, and offering any alternative options you may have