Trump’s Tariffs

Trump initiated tariffs with major U.S. trading partners on 1 February, then retracted them on 3 February. Executives across the North American continent expressed uncertainty regarding their preparedness for the possible supply chain and economic shocks.

For executives at manufacturing and distribution companies with supply chains that stretch across borders, pricing decisions must be made at a highly accelerated pace to manage the economic shocks associated with new tariffs.

Today, more than usual, pricing is in the business resiliency department. Pricing experts must guide executive decision-making through periods of economic shocks and uncertainty.

We have been writing, teaching, and consulting on proper pricing responses to economic shocks for many years. During economic shocks, our statement of “Pricing is a verb” becomes abundantly clear. Executives form war rooms in search of decision certainty when business-as-usual is no longer possible.

Consider the choices: A decision to absorb all of the cost increase can leave a company in a precarious financial position. We witnessed that in the fate of Pilgrim’s Pride Chicken when they chose to absorb the cost increase of feed in 2008: bankruptcy and sale to JBS. Or that of Yellow Freight in 2023: also bankrupt.

The alternative is to raise prices, but at what cost? Will it impair sales? Cede market share? Harm the brand? Many uncertainties and tradeoffs must be faced.

Any new tariff will impact companies and products differently due to asymmetries.

Each product has a different cost of inputs from impacted supplying countries. As such, the impact of the tariff on prices would vary at the product, or at least the product segment level. As a baseline, executives should calculate the needed price increase to keep the dollar profit contribution constant. The actual price change is likely to vary from this baseline calculation.

Each competitor in a market has a different level of dependency on inputs from the impacted supplying countries. As such, companies should realize the baseline price increase is only the start of the analysis. Here, the Competitive Price Reaction Matrix can determine if the full baseline price change should be taken or not. (See “Competitive Price Pressures? How to React and Why”)

Some competitors, those less dependent on the impacted countries, will identify an opportunity to raise prices greater than the baseline, perhaps on a product-by-product basis because their competitor’s baseline price increase is higher due to their higher dependency.

Other competitors, those more dependent on the impacted countries, will be faced with a tradeoff between absorbing some of the cost increases at the loss of profitability to retain market share or raising prices with the threat of creating a competitive opening that reduces their market share.

Either way, for many industries, prices from suppliers will increase in light of the tariffs. With price increases, demand decreases for any normal good, and the quantity sold will decrease.

Hitting sales quotas, revenue targets, and margin guidance becomes an unreasonable expectation in these impacted industries. Goals must be adjusted or they become a farcical fiction in the face of economic shocks.

This means pricing must work with supply chain and operations to uncover the specific impact, with competitive intelligence to identify asymmetries, with finance to reset expectations, and with marketing and sales to reset goals and quotas. And across all of these decisions, the CEO will be held accountable by shareholders and analysts. Hence, he or she will also need to be engaged, just as I wrote in my text “Pricing Done Right”,

Pricing capability is like the proverbial planting of trees. “The best time to plant a tree is twenty years ago. The second-best time is today.”

We exist to help companies like yours either get started on building the pricing capability or guide your team through uncertainties and economic turbulence.