Tariffs and Pricing
Question from a reader: Hi Mark, I have been following you on LinkedIn for several months and I really admire your posts and articles. I am wondering if you have given any consideration into writing an article about tariffs from a pricing perspective? There appears to be a real lack of literature available. Please keep the posts coming!
And a follow-up question: Hi Mark, if I could add, one of the debates that we are having internally is how transparent we should be in our pricing. For example, do we bury it into our overall fee or do we consider expressing it as a separate line item such as a parcel courier might do with a fuel surcharge?
Fascinating questions. Like you, I haven’t seen any literature on this topic, but let’s apply fundamentals. First, what should you do with respect to tariffs? I’m guessing you’re really asking, should you raise your price? The answer will fall on the decisions your buyers are making.
First, if it’s a “will I?” product, then there is no reason you couldn’t raise your prices. It may damage sales a little, but not by much.
If it’s a “which one?” product, then you have to look at what your competitors are doing. Are they being hit with a tariff too or not? If they are, then you can likely raise your price and your competitor will follow. The big problem occurs when you face a tariff and your competitor doesn’t. This will not be easy.
Let’s say before the tariffs, you charged $100 and your competitor charged $90. Your product is better, though, so about half the market bought from you and the other half from your competitor. Suddenly, due to a tariff, your costs went up 10% but your competitors costs didn’t change. You have three basic choices:
- Don’t raise your price and accept smaller margins. Buyers in the market will not see any change in competitive dynamics.
- Raise prices. Maybe your competitor will raise prices anyway, just to make more margin. If your competitor does not raise prices, then you will likely lose market share. Some people will think your product is not worth that much more than your competitors and will switch. However, some people probably do value your differentiation more than you raised your price. You will be serving the segment who value you the most. You will want to estimate how many people will still buy from you.
- Get out of the business. If you can’t be profitable by holding price and you will lose your market by raising price, this may not be the business for you.
The second part of your question, about being transparent, implies you are already thinking about option two above. The answer again will come from the mind of your buyers.
As a general rule, you want to blame price increases on cost increases. A new tariff is definitely a new cost increase. You should mention the tariff. But should you have it as a separate line item on the invoice?
If you are 100-percent certain you will remove the price increase if the tariffs get removed, then it probably makes sense for it to have its own line item. On the line item, label it as hopefully temporary. This signals your intent and will make your buyers less upset.
However, you could think about this price increase as testing a new price point while having a built-in excuse. If you want the option of holding prices high if the tariffs are removed, then don’t make it a separate line item. What do you think of companies who put in a fuel surcharge line item when gas prices were really high, but when gas prices came back down they didn’t remove the line item? They look sleazy.
One additional point: These political times are very polarized. Anything you write or say about the tariffs could be taken as a political stance. That could alienate half of your market. Be careful and test your intentions with those on both sides of the political spectrum.
Please let us know what you do and how it worked out.
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