Protecting pricing power in a tariff era

Few things can cause a pricing frenzy quite like tariffs. Many of us have been through this before – but the announcement of tariffs on Canada, Mexico, and China will force change on many companies in the coming months. It’s important to know what choices you have, what decisions you need to make, and how to best serve your customers while protecting your company through this period.

Consumers are about to feel some pain. When consumers feel pain, B2B is close behind. Here are some of the products that will get hit the hardest: 

Understanding the landscape

Never use tariffs as a reason to do a blanket price increase across all offerings. Never! This is a guaranteed way to destroy your own pricing power in the long term – especially when we don’t know how long the tariffs will last. What happens when the tariffs are eventually lifted? (Same question many have seen re: what happens when inflation slows? “Where’s my price decrease?”) It’s important to keep your pricing aligned with value – and be thoughtful about where and how you pass through costs.

Customers will remember how you treated them during this time. There is a need for an overall strategy & objectives along with account level plans. Here are some things to think through:

1. Create overall strategy with market share and/or profit goals. Clear goals will help dictate your best path forward. Some product lines may be able to absorb some of the increased costs, while for others, you will have to pass the cost through to the customers. There is a middle ground between these options, which is a part of your overall market strategy. As an example, you may want to exit out of certain markets. Or, if all of your competitors seem to be passing costs through, you may want to absorb some of it to stay competitive in the short term and gain market share.
   
   You may choose to simply pass the increase through the affected products. If you choose to pass the cost on, make sure you get the timing correct. If you’re too slow to act, your tariff costs will increase, you’ll start bleeding profits, and you’ll become uncompetitive in the market. Having a clear goal will help ensure you’re driving towards the right outcome - executing quickly will help with gaining a competitive advantage.
   
2. Understand legal restrictions. Find out where you’re locked into contract terms and where you have flexibility to make price adjustments. When you’re locked in, are there other product lines that can absorb the cost? Or, are you able to switch products for your customers to maintain the same level of pricing and differentiation?
   
3. Review alternate supply chains. In many cases, tariffs will impact the components of your product (e.g., computers). Make sure you keep your product differentiation in the foreground. If switching component suppliers would change that differentiation, do not go down that path. Get a sense of which components can be purchased domestically and the impact to the end customer, by product line, to help create your plan. If you’re Dell and you’re selling computers, can you switch suppliers for some of the components? Do you need to raise PC prices? What are your competitors doing?
   
4. Monitor competitors. Are your competitors buying from China, Mexico, and Canada for their components? See if you can find out the severity, and if they’re changing suppliers. This information is a key part of staying clear on your differential value, which may change through these events. As an example, if you are able to get a local supplier without impacting your differentiation, then can you lock them into a sole supplier relationship thus creating a cost advantage relative to your competitors? 
   
5. Gauge your pricing power by account. You need to understand where you can raise prices without losing market share. Start by looking at your accounts by buyer type and transaction history to better understand their likelihood to stay with you and how to approach your strategy and communication plan:
   
   Relationship Buyers: The better your relationship is with each account, the more levers you can pull to keep that customer with you. Think Customer Lifetime Value (CLV). Neither of you want to lose the relationship: how can you work together to make it right and come out of the situation stronger?
   
   Value Buyers: For some, you may want to consider adding features or functionality to extend the relationship and incentivize them to stay with you. Each account will derive different value from your products and services, and a price change is a good time to gauge what that value is and how you can better serve them in the future. 
   
   Price Buyers: They’re likely already looking for alternatives and options. These will be much more transactional conversations. Don’t spend a lot of effort here – just know where you can compete on price, what your walkaway is, and if possible move them to lower value products for less cost. If you ever want to get these customers back, all you have to do is drop your price.
   
   Poker Players: Look out for classic tells that they’re bluffing to maintain pre-tariff pricing or even get a better deal. This could look like ghosting, “should cost” modeling, and limited access to the decision-maker. Prepare for these conversations by revisiting your Give-Gets and good-better-best structures to make sure they have choices and lower-tier options if they become more price sensitive.

Once you have your strategy, goals, and account level plan, you are ready to execute. Remember: 

• If the customer is willing to accept an increase, pass it through quickly.
  
• If you believe the customer is not willing to accept the full increase, make a plan for what portion of the tariff you will absorb. Can you switch this customer to different products or add more services to make them stay? 
  
• Identify unprofitable customers, and use this time to right the relationship. These conversations can help you to calibrate on fair pricing where you’re underpaid – and ensuring you get a fair increase, or walk away from the relationship altogether. 

Focus on creating relationship buyers

Keep in mind that tariffs can be temporary. They could be postponed further, increased over time, or removed altogether relatively quickly. How we manage tariffs, how that cost is swinging, and how it will impact the strategies you implement can help differentiate you at a time of major change.

The most important thing is to stay on top of the information as it comes, which includes what your competitors are doing and how your relationships with customers are changing. Those with the strongest relationships will find ways to continue to build value together versus jumping the gun on blanket increases or fighting a race to the bottom on price point.