While there is great uncertainty at this stage as to what, how large, and where imposed tariffs will happen, one thing is certain: price adjustments will result.
To make pricing changes that best respond to this new environment, you need to take into account the following key factors:
- Impact on Costs
As a first step, you need to think about the impact that tariffs will have on your costs. Two factors to consider include:
The percentage of your product costs that will be impacted by tariffs.
If you’re a small auto parts manufacturer such as metal stamping, your material costs are unlikely to be significantly affected by tariffs. In this case, suppliers will likely be domestic, and they, in turn, are unlikely to face tariffs. On the other hand, if you’re a larger competitor such as Ford or GM with products integrating parts such as microchips, drives, and other critical components, tariffed materials may account for up to 10-15% of costs.
Your supply chains.
If your supply chain involves sourcing from providers whose goods and materials may be subject to tariffs, you need to evaluate if and where there are alternatives. Specialized medical devices companies that depend on particularly advanced sub-components may have few alternative sources. However, other companies, such as food manufacturers may have alternate sources of supply. If you depend on steel or other products that are or could be tariffed, globalization means that alternate supplies should be.
If there are few alternatives or capacity is significantly limited, then expect costs to rise even more severely than would be indicated by the tariffs only. In this case, you should aim to lock in margins and generally reduce uncertainty by seeking long-term contracts with suppliers and buyers.
- Customer responses to price
Customers’ responses to price vary depending on the relative value they ascribe to your products and their ability to source elsewhere. If your product is key, cannot be easily substituted, or switching represents a significant risk, then customers will likely be less price sensitive. For example, U.S. health regulations make switching products difficult and, together with high profit margins, these make medical products and devices less price sensitive even though some components that go into these products may be subject to tariffs. Conversely, if there are readily available substitutes, customer margins are tight, or you sell large volumes that are not critical to their activities, expect price sensitivity.
Certain products, such as specialty steel may also qualify for tariff exemptions so that in such cases, prices would not be impacted. However, the process is highly risky, and as of the end of February, there was a backlog of an estimated 16,000 applications. Also, decisions are notoriously inconsistent. For example, Shell applied for tariff exemptions for high-specification steel pipes from Nippon Steel for deep water oil and gas production. The Commerce Department ruled that 3.5 inch tubing was acceptable, but not 4.5 inch tubing.
- Competitors
While your competitors will also face the same tariff pressures, they may be impacted differently, and their responses may differ depending on their cost structures, objectives, supply chain options, target markets and customers, and strategies. Also, you need to look at previous competitor actions to determine which markets or customers are viewed as critical.
Competitors may try to minimize price increases in critical markets while countering the impact on their bottom line by increasing prices more in other markets. You need to understand your key markets and develop your pricing strategy based on which markets are critical and prepared to defend given competitors’ objectives and pricing strategies.
- Implementation: how to increase prices
So, let’s say that you’ve determined that you’ll need to increase some prices. What should you do?
The key is not to make customers feel they’ve been taken advantage-of; something that could rebound against you over the longer-term. Avoid shock. If prices are raised too much at once, anger results, and while customers may stay with you, the relationship becomes sour. They may bolt at the first opportunity.
Some basic principles for successfully implementing price increases include:
a. Time increases carefully to match market developments so that customers can better understand the rationale
b. Work with clients to mitigate the damage; for example, you may agree to a perceived price increase schedule that is fair to both, given the changing nature of the cost curve
c. Reinforce and focus on the price-value proposition by segment
d. Offer improvements in the product/ service with the price increase
e. Create product/service bundles
f. Above all, ensure that the sales force is closely engaged in preparing and presenting the value-proposition
One final piece of advice, it’s very unlikely that the market will respond exactly the way that you’ve mapped out, so be prepared to monitor the market regularly. Get feedback from your sales team and customers, collect data, and review that information. Expect to make course corrections.
