President-elect Trump is expected to impose new tariffs in 2025. A recent statement was released promising tariffs on imports from Mexico, Canada, and China as the priority, with previous statements around universal tariffs across all imports. While the details continue to unfold, businesses should take necessary steps now to prepare for potential impact. Additionally, organizations should prepare for potential container rate volatility as businesses respond to tariff threats and adjust to a new market environment post-implementation.

The original intro paragraph of this article referred to changes to section 301 tariffs that went into effect August 1, 2024. This information was redacted and updated to reflect the current US economic and market outlook. 

How to Mitigate Impact from Tariffs

While tariffs are a common economic and political tactic, they can cause significant disruption to affected industries and businesses. These organizations must make critical operational and pricing decisions to ensure their business goals and profitability are secured.

Pricing plays an integral role in managing the impact of tariffs on business profitability. Additionally, there are a handful of key operational strategies companies should evaluate prior to implementing pricing actions to help minimize undesirable cost increases.

Operational Strategies to Minimize Cost Increases

Though tariffs will affect each business differently, below are several considerations for how to operationally minimize the cost impact.

Submit Government Appeals
Businesses can hire trade attorneys to submit appeals to the government as to why this tariff should not impact a specific product. While this is a long process, the effort may be beneficial, especially where businesses are significantly impacted yet their products seem to be outside the tariff’s intent.

Tariff Code Reclassification
In some cases, your products may not be classified accurately. Confirming your products are correctly classified or making slight changes to your product definitions can result in products being reclassified to a non-impacted category. Additionally, minor changes to packaging or material used can also result in a tariff code reclassification without sacrificing quality or customer value. Note, this may or may not be applicable based on the type of tariff being imposed.

Duty Drawback
If your business is hit with a tariff but you subsequently export that product outside the US, you may be eligible to get part or all of that tariff/duty back.

Manufacturing and Sourcing Locations
In 2023, Mexico surpassed China as the leading source of imported goods by the United States. After the China tariffs from 2018-2021, many companies shifted production to Mexico, began sourcing from countries in Southeast Asia (e.g., Malaysia, Thailand, Vietnam), or chose to reshore production. In the case of any tariffs, it’s critical for organizations to assess where the cost of importing may exceed the cost of sourcing domestically or from alternative countries. Businesses should evaluate the viability of their manufacturing and sourcing locations and consider moving all or part of operations to another country to avoid the tariff by changing the product itself when it’s leaving affected countries or changing the country of origin.

Product Value vs Cost
Many businesses may choose to stop offering a certain product if the cost exceeds the value. In this scenario, organizations can develop a set of criteria—product value, size or weight, domestic options, brand replacements—to determine the viability of importing. For example, a product’s cost may increase so much that it can no longer fit into an existing price ladder / good-better-best structure. In this case, organizations may choose to promote similar replacement brands, adjust the price ladder, or stop providing that product altogether.

Pricing Strategies to Mitigate Profit Impact

Once you have evaluated how to minimize cost changes, companies can implement tactical pricing actions to mitigate the impact on profit margins.

Item by Item Price Increases
One common and simple tactic is to pass through costs directly on each product at the same level or percentage as its costs have increased. This requires a clear understanding of each product’s specific cost change amount, and then passing through the increase item by item. It is important here to align on your goal of maintaining margin $ or margin % as this will impact your pass-through. This is a straightforward approach to offset cost increases but may not reflect the value of your products and services.

Strategic Pricing
This approach considers the key drivers of business profitability as well as customers’ key products in their market basket. A strategic pricing approach might raise the price more on products that are less critical to customer satisfaction, value, and profitability, and pass through smaller increases on those products that are more critical. This is a differentiated approach that protects customer relationships, volume, and profitability.

Surcharges
Some businesses may prefer to implement an added surcharge or fee that covers the new costs. Operationally it is the simplest and most immediate approach, and it provides transparency to customers. However, it doesn’t leave you any room for negotiation and can back you into a corner if competitors do not implement similar surcharges. If you believe tariffs are a longer-term cost, it is often better to incorporate these new costs into product pricing versus a surcharge.

Customer Communications
In all cases, customers need to be notified of price changes. Companies need to consider how to communicate increases, e.g., passing through cost increases, costs specifically related to tariffs or bundled with other items, part of a broader value-based pricing adjustment, etc. These communications have a significant impact on customer relationships and reactions. For example, customers may easily accept surcharges or item by item price changes that are affected directly by tariffs, but they may demand price decreases later down the line.

Market Intelligence
How are your markets and competitors affected by and responding to tariffs? A targeted market intelligence study helps companies understand competitors’ exposure as well as build a proactive plan that mitigates adverse impact. For example, if your competitors have shifted their supply chain away from China or other affected countries and are not impacted by tariffs, you are at risk of significant losses if you blindly raise prices.

Market intelligence studies can also track customer sentiment in relation to price changes, e.g., price sensitivity, key purchase and value drivers, barriers to switching to a competitor, etc. These findings can be utilized to craft pricing actions in response to tariffs that support positive customer relationships.

Managing Shipping Container Rates

Tariffs on imported goods, especially on a large scale, can affect global shipping activities and patterns, including container rates. Additionally, we have historically seen how a surge in demand to ship ahead of upcoming tariffs has impacted the cost of importing goods and placed additional pressure on businesses. There are a few approaches organizations can take to mitigate the impact of container rate uncertainty and volatility.

Surcharges
When container rates are expected to be temporary, many businesses can successfully introduce a surcharge or a temporary increase to an existing fee. Be sure to include language that specifies when the surcharge applies, such as when rates go above or below a certain level.

Price Adjustments
Organizations can also take a more strategic approach to managing margins. This is beneficial when cost increases are expected to be long-term, or you want to incorporate shipping costs into product pricing. In this scenario, businesses should consider a differentiated or value-based pricing approach to ensure costs are accurately and optimally embedded into your pricing structure.

Market Intelligence
Market intelligence studies, such as in-depth interviews with freight carriers or other experts throughout the value chain, can help businesses gauge how long increases are expected to last and what actions competitors are taking to help craft optimal operational and pricing strategies.

Operational Strategies
Many businesses may benefit from certain operational strategies to mitigate impact from container rate increases. This includes:

  • Evaluate whether paying the peak season surcharges (PSS) could lock in capacity and be more cost effective than paying spot rates.
  • Double book where there aren’t penalties in doing so.
  • Consider having resources on the ground to advocate for your business needs.
  • Evaluate whether certain products or categories are still viable for import. For example, high cube, low-cost categories will struggle to absorb or pass on the additional costs, making domestic alternatives more attractive while container costs remain high.
  • Keep a pulse on when the market is expected to calm and businesses can get back to contracted rates, but be ready for the unknown.

Profitably Manage Cost Increases with INSIGHT2PROFIT

While cost volatility has been pervasive for the last few years, businesses need to remain diligent in managing costs in order to protect profitability. INSIGHT is your partner in identifying the optimal pricing strategy for your business goals, and helping you implement through to profitable outcomes. Additionally, our robust market intelligence capabilities help identify profitable, risk-adverse pricing actions in the face of volatile market conditions. Contact us to learn how you can mitigate the effects of cost increases, such as tariffs or container rates, to help you meet your growth goals.

Take the first step towards pricing excellence!