Don’t Make This Critical Mistake when Addressing Tariffs

Historically, companies have made the critical mistake of using customer price increases to offset the costs of tariffs. With the tariff increases being designed by the new Administration, it is important to diversify tariff actions based on accurate, specific and actionable insights on each customer’s and product’s profit contribution. Those insights can be gained quickly to successfully continue to protect and grow profits.

The impact of global trade policies is a key element in establishing corporate strategies. It is important to recognize there are both short-term (weeks) and long-term (years) considerations in protecting profitability from tariff increases.

Protectionism versus free-trade policies have long been a part of political landscapes. I am not advocating the pros or cons of the utilization of tariffs. However, the new administration’s position on levying new tariffs will significantly impact revenue growth and potential earnings for many companies. In response to tariff increases, companies typically perform the following:

Long-Term Actions: determining the end-to-end implications of tariff increases on suppliers, manufacturers and distributors. Then, this information is used to develop multi-faceted tariff mitigation strategies such as the following example by Williams-Sonoma.

Short-Term Actions: making the critical mistake of reacting using a “one size fits all” strategy of price increases across their customer base. This type of action does not provide sustainable performance in maintaining or growing margin contributions.

Short and long-term tariff strategies can be far more effective knowing the specific profit contributions of every customer and product. This knowledge provides for diversified strategies based on high, marginal and unprofitable performance. In addition, these actionable insights can be applied in a matter of weeks as the political landscape shifts and turns.

Based on years of Competitive Insights client findings, customers can be grouped into the following three performance segments:

• The very small number of customers that provide 95% of the profit (Critical)
• The majority of customers that provide only 5% of the profit (Marginal)
• The customers that are totally unprofitable (Unprofitable)

Tariff strategies can then be based on informed actions for each performance segment:

• For Critical customers, some price increases may be needed, depending on the product mix purchased. The key is to ensure tariff related strategies prioritize keeping a strong and robust business relationship.
• For Marginal customers, it is imperative to understand what is driving their performance (sales volume, pricing, discounts, etc.). This root cause analysis can then be factored into tariff mitigation strategies for each customer.
• Unprofitable customers are only going to be more unprofitable if nothing is done. They should be carefully examined to understand why they are not generating net profitable performance. Corrective actions need to also include the additional negative impact of new tariffs.

Formulating profitable tariff strategies must be based on a specific understanding of profit contributions by customer and product.

Companies must act now to gain an accurate, specific and actionable understanding of each customer’s performance to successfully protect profits.

Competitive Insight’s AI solutions can create accurate visibility to your current customers and portfolio profitability in weeks. This visibility provides fact-based insights on how to best mitigate tariff increases to protect margins and profitable performance.

We would love to hear your thoughts and comments. Please feel free to reach me directly at rsharpe@ci-advantage.com or visit our website at www.ci-advantage.com.

All the best,

Richard Sharpe
CEO – Competitive Insights