Tariff Increases and Container Rate Hikes: How to Navigate Cost Changes and Profitably Mitigate Impact
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Operational and pricing strategies to help businesses maintain profit margins in the face of cost increases and unpredictability.
The United States will increase tariffs across certain sectors of imported goods from China, many going into effect August 1, 2024 with a handful in 2025 and 2026. Affected sectors include:
Many of the affected sectors will see increased rates on already existing section 301 tariffs, with several new additions as well. Key changes are outlined below:
Within each sector category, there are a range of different product classifications expected to be impacted.
The US automotive industry is expected to be most affected, though businesses in other sectors, especially those that buy and sell steel and/or aluminum, will face impact. Additionally, retaliatory economic action from China is predicted, especially on the automotive industry.
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.
Duty Drawback
If your business is hit with a tariff but you subsequently export that product outside the US, you are 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 previous round of China tariffs, many companies shifted production to Mexico, began sourcing from countries in Southeast Asia (e.g., Malaysia, Thailand, Vietnam), or chose to reshore production. With this latest round of 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 China 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 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
Shipping container rates are elevated across the world, including key routes to and from China. A surge in demand to ship ahead of upcoming tariffs has significantly impacted rates, alongside attacks on shipping vessels in the Red Sea causing the re-routing of ships and expensive delays.
With over 200% annual rate changes, the increase in shipping container rates is another key factor affecting the costs of imported goods, placing additional pressure on businesses. There are a few approaches organizations can take to mitigate the impact.
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:
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. 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 to help you meet your growth goals.