What Tariffs Mean for Your Pricing in a Tariff-Driven Economy

Introduction

Tariffs have long been used as economic and political tools to influence the cost of goods and reshape market dynamics. For pricing and revenue growth managers, understanding their impact is critical to making informed decisions on pricing strategies, market positioning, and overall profitability.

Today, tariffs are resurfacing with renewed urgency, especially for European businesses. Beyond previous focus on U.S. driven global tariffs, new tensions between the EU and U.S. are escalating. The potential for retaliatory duties, supply chain disruptions, and inflationary pressures creates a volatile backdrop that pricing leaders cannot ignore. With sectors like automotive, agriculture, and FMCG under increased pressure, the question is no longer if tariffs will affect pricing, but how deeply and for how long.

This article explores the implications of tariffs on pricing, how demand responds to these changes, and strategies businesses can use to navigate tariff-driven environments.  

Inside, you will find: 

• The ripple effects of tariffs on demand, cost, and competition 
• Key considerations for setting prices under tariff pressure.

• A 4-step approach to optimize pricing strategy in uncertain times. 

• A look at Test-Driven Price Optimization (TDPO), as a reliable method for pricing under change. 

The Pricing Impact: A Simple Breakdown

Scenario A: No Tariff Applied

In a scenario without tariffs, a foreign manufacturer may sell a product to a domestic importer for $100. The importer applies a typical markup of 30%, then resells the product to domestic consumers at $130. 

Scenario B: When a Tariff is Introduced

If a 25% tariff is applied, the domestic importer must pay an additional $25 to the government. At this point, businesses face a choice: either absorb the tariff, reducing gross margin from $30 to just $5, or pass the cost to consumers by raising the price to $155 or even $163 if maintaining the original markup. 

In categories like FMCG, where price sensitivity is high, this can lead to declining demand and disrupted market share. The impact varies based on consumer willingness to pay, competitive moves, and the speed at which companies can adjust pack formats, pricing tiers, or promotional strategies. 

With current EU-U.S. negotiations still uncertain and retaliation measures possible as early as July, pricing leaders must be ready to adapt pricing models quickly. Using outdated assumptions could leave brands either overexposed or underpriced. 

The Ripple Effects of Tariffs on Markets

Beyond direct price increases, tariffs can lead to broader economic consequences, including retaliatory measures from affected countries. If the U.S. imposes tariffs on Canadian or Mexican imports, for example, these countries may respond with their own tariffs on U.S. goods. This can lead to market uncertainty, increased costs for businesses, and shifts in supply chain dynamics. Companies that fail to anticipate these changes risk losing their competitive edge.

A well-documented example of tariff impact is the 2018 washing machine tariff imposed in the U.S. on imports from LG and Samsung. The immediate effect was an 8-50% price increase, but an unexpected consequence emerged: 

• Domestic washing machine manufacturers also raised prices, even though they weren’t subject to tariffs.
• Dryer prices increased as well, despite dryers not being affected by tariffs, likely because pricing teams observed the market shift and saw an opportunity to adjust their own pricing.

These real-world cases illustrate how tariffs create complex pricing dynamics. Businesses need to move beyond simple cost-plus pricing models and consider broader market reactions when adjusting their pricing structures.

Key Considerations for Pricing in a Tariff Environment

Navigating a tariff-driven market requires a strategic approach to pricing. Businesses must evaluate multiple factors, from the duration of tariffs to their impact on supply chains and customer demand. A one-size-fits-all response is rarely effective, making it essential to assess different pricing scenarios and adapt accordingly. Below are key considerations for making informed pricing decisions in a tariff-affected environment.

1. Duration of the Tariff

One of the first factors businesses must assess is whether a tariff is temporary or permanent. If the tariff is short-term, lasting only a few months, absorbing the cost may be a viable strategy to maintain stability and avoid sudden price changes that could disrupt consumer trust. However, if the tariff is expected to last for years, businesses need to rethink their pricing, sourcing, and overall market approach.

• Short-term tariffs: Absorbing costs may help maintain stability.
• Long-term tariffs: Require pricing, supply chain, or product strategy adjustments.

2. Supply Chain Adjustments

Another critical consideration is supply chain adjustments. Companies may evaluate whether switching from international to domestic suppliers is feasible. In some cases, shifting production to domestic facilities can eliminate the need to pay tariffs, but this comes with its own cost and logistical challenges.

Governments often introduce tariffs to encourage domestic production, but the reality is that many businesses cannot easily switch suppliers without significant disruptions.

• Switching suppliers: Moving from international to domestic can help avoid tariffs.
• Domestic production: Eliminates tariffs but comes with cost and logistical challenges.

 3. Price Adjustments

For pricing teams, the biggest question remains: should the additional tariff cost be fully passed on to consumers, or should the business absorb part of it?

A one-size-fits-all approach is rarely effective. Instead, companies must assess their product portfolio and determine where price increases will have the least impact on demand. If certain products have lower price sensitivity, they may be able to absorb higher price adjustments, while others may require a more cautious approach.

• Identify resilient products: Focus price increases where demand impact is minimal.
• Explore pricing strategies: Use bundling or category-specific price adjustments.
• Optimize promotions: Maintain base prices while reducing discounts to protect margins

Optimizing Pricing Strategy in a Tariff-Driven Market

Without a strategic pricing approach, tariffs can disrupt demand, squeeze margins, and create long-term financial challenges. Here’s how to optimize your pricing strategy in response to tariffs.

Step 1: Impact Assessment

Effectively managing tariffs requires a structured approach that includes impact assessment, segmentation analysis, and competitive benchmarking. The first step is to simulate different tariff scenarios, such as a 10%, 25%, or 30% tariff, to understand how they affect:

• Profit margins
• Consumer demand
• Competitive positioning

Effectively managing tariffs requires a structured approach that includes impact assessment, segmentation analysis, and competitive benchmarking. The first step is to simulate different tariff scenarios, such as a 10%, 25%, or 30% tariff, to understand how they affect profit margins and consumer behavior. These simulations provide a data-driven foundation for making informed pricing decisions.

Step 2: Market Segmentation & WtP Analysis

Market segmentation is another essential tool. Different consumer groups react differently to price increases. Some may be highly sensitive to price changes, while others may have a higher willingness to pay. By analyzing factors such as demographics, shopping behavior, and brand preferences, businesses can determine which customer segments are more resilient to tariff-driven price changes.

Adjusting pricing strategy should also go beyond simply increasing prices. Companies should explore alternative pricing models, such as bundle pricing, to offer more value while offsetting higher costs. Discounting strategies may also need to shift, rather than lowering base prices, businesses can reduce promotional spending to protect margins. Not all consumers react the same way to price increases. Using Willingness-to-Pay Research, companies can identify:

• Which segments are less price-sensitive and can bear price increases.
• Which channels (e.g., online vs. in-store) show the highest resilience to pricing changes.
• Opportunities to target higher-value segments to offset revenue loss from tariff-driven price increases.

Step 3: Type of Price Change

Businesses must determine how, where, and by how much to adjust pricing in response to tariffs. Instead of a blanket 25% price increase, companies should:

• Assess which products can absorb price increases with minimal demand impact.
• Apply differentiated price increases across product categories rather than applying a one-size-fits-all approach.
• Explore alternative pricing strategies, such as value-based pricing, subscription models, or tiered pricing, to maintain customer retention while offsetting increased costs.

Some businesses may also adjust pricing gradually rather than implementing a single sharp increase, allowing consumers time to adapt to the new pricing levels.

Using PriceBeam’s RGM Optimizer, simulate various pricing outcomes; absorption, partial pass-through, differentiated pricing across geographies. 

Step 4: Competitor Response

Competitive responses must also be factored in. If all competitors raise prices in response to tariffs, then businesses have more flexibility to do the same. However, if some competitors choose to absorb the tariff cost, pricing teams must assess whether maintaining lower prices can be a strategy to gain market share.

Using competitive benchmarking, businesses should analyze:

• Which competitors absorb tariffs and which pass them on to consumers.
• How pricing adjustments influence market positioning and customer perception.
• Whether a company can gain market share by strategically pricing below competitors while maintaining profitability.

These four steps help businesses structure their response to tariff-induced volatility. But theory alone is not enough. What is needed is a method to validate decisions before they reach the market. 

Test-Driven Price Optimization

One of the most effective ways to navigate tariff pricing is through TDPO, test-driven price optimization. This method allows businesses to run virtual simulations that predict consumer reactions to different pricing scenarios.

Using virtual simulations to predict consumer reaction, it allows businesses to:

• Run multiple pricing simulations before implementing real-world changes.
• Assess demand elasticity under different tariff levels.
• Determine the best mix of price adjustments and cost absorption to maximize profitability.

In practice, businesses can create virtual consumer models that simulate purchasing behavior based on real-world data. For example, a company might test a scenario where a 25% tariff is fully passed on to consumers versus a scenario where only half the tariff is absorbed. The simulation can then provide insights into which strategy leads to the best balance of profitability and demand retention. This is particularly valuable in tariff-driven markets because it allows businesses to test multiple scenarios quickly and cost-effectively. Instead of making pricing changes blindly, companies can base their decisions on actual data, reducing the risk of revenue loss. 

💻 Watch our webinar on: Test-Driven Price Optimization (TDPO)

Conclusion

Tariffs create pricing challenges, but businesses that take a data-driven approach can successfully navigate these shifts. Understanding how consumers react to price changes and leveraging advanced pricing insights are essential for maintaining profitability in a tariff-driven market.

Tariffs are unpredictable. Your pricing strategy should not be.

By assessing the impact of tariffs, segmenting the market based on willingness-to-pay, and using test-driven pricing models, businesses can make informed decisions that maximize revenue while minimizing risk. Pricing is not just about covering costs, it’s about strategically positioning products in a way that balances profitability and consumer demand.