The Tradeoffs of Passing Rising Costs to Customers Amid Tariffs

As talks of tariffs turn into increased prices for consumers, many US businesses are experiencing declining profit margins.

Business owners are now weighing the pros and cons of passing these costs along to the consumer versus absorbing the hit to their bottom line.

Before raising the cost outright, some businesses are choosing to eliminate perks like free shipping to offset costs.

As businesses navigate the current landscape, it’s important to remember there is no one-size-fits-all approach. Rather, each strategy has its own advantages and disadvantages for both businesses and customer bases.

Raising Prices Directly

This is the most common response to market volatility. It can also have the most significant long-term impact on consumers.

Pros:

• Easy to implement, especially for businesses with a strict pricing policy that makes more nuanced responses to market activity difficult.
• When applied to locations outside the U.S., direct price increases can help offset the impact on American consumers, shielding retailers from potential future tariff decisions.

Cons:

• This strategy can be confusing for consumers, who may not understand why prices are raised if there isn’t clear communication.
• It can be difficult to reduce prices again should the market shift, which could upset consumers if a former trade policy is no longer in effect.
• If too many retailers adopt this approach, it can increase the risk of inflation.

Surcharges

Surcharges can be a more flexible alternative to direct price increases, as they can be implemented and removed as needed. However, not all businesses are structured to support these changes.

Pros:

• This strategy creates transparency for businesses, making it easier to explain to consumers that price changes are directly linked to market conditions.
• Increases can be removed, when necessary, without the need to revisit contracts.
• Businesses can increase the minimum for free shipping, or eliminate the perk altogether, as needed.

Cons:

• Not all businesses have the flexibility to support this approach. Many would need new policies regarding price adjustments with suppliers and producers.
• Smaller businesses may not have the software needed to adjust individual line items like surcharges effectively.

Alternative Suppliers and Production

Businesses that source their products from overseas may begin seeking alternative suppliers or producers to mitigate costly fees.

Pros:

• A diverse supply chain roster can have multiple benefits, especially during economic shifts in certain countries.
• This strategy can provide opportunities for businesses to communicate about sourcing, which increases transparency and consumer trust.

Cons:

• Suppliers and producers located outside tariff zones may still have higher costs, so thorough research and planning are essential.

Ultimately, businesses will likely rely on a mix of strategies or choose different approaches for specific product lines. It’s important for business owners to weigh these pros and cons with a business and financial advisor. WSFS Bank has small business resources available, including relationship managers who can help discuss unique opportunities and challenges.