How to Protect Your Margins in the Face of Rising Tariffs

At the time of this writing, the U.S Trade Representative has just imposed a 15% tariff on $125 billion of targeted goods imported from China. This list of goods includes things like smartwatches, Bluetooth headphones, televisions, and footwear. After December 15, the 15% tariff will expand to include cellphones, laptops, toys, and clothing.

This understandably has retailers quaking in their stylish boots. 

There are a number of ways that retailers can react to this pinch on their margins, which are already dwindling. 

Large U.S. retailers like Walmart, Target, and Amazon, whom we’ll call The Big Boys, will leverage their size by leaning on suppliers to absorb the extra cost so customers don’t have to. Anyone without that kind of influence has two choices:

  1. Compete on price and erode margins: resist the urge to raise prices much, if at all, to attract a larger pool of customers who were driven off their typical shopping paths by now-higher prices across your vertical.
  2. Raise prices and preserve margins: raise prices so as not to diminish margins while possibly losing business to The Big Boys and The Price Competitors.  

Neither of those is very appealing as presented, and it’s difficult to predict which will deliver the greatest short-term and long-term gains. And, with an election year upon us, it’s hard to say how long the tariffs will remain in place.   

There is a Middle Path, though, one that leads to long-term growth and stronger customer relationships. But like any Straight-And-Narrow, it has its challenges. This Path requires a customer-focused strategy that includes marketing, merchandising, and finance.


USE CUSTOMER ANALYTICS LIKE LIFETIME VALUE FOR BETTER DEMAND FORECASTING

Your first-party customer data has some powerful potential, and one thing that it can do is empower you with a sturdier demand forecast. There are oodles of metrics that retailers use to forecast demand, but in a retail environment where protecting margins is key, customer analytics allow merchants to determine what will be not just “in demand in general,” but what will be in demand by high-value customers and full-price shoppers. 

By creating a product plan around the discount sensitivity, shopping frequency, and spending behaviors of segments with the highest customer lifetime value, you buffer yourself against excess inventory. 


OPTIMIZE PRODUCT LINE ARCHITECTURE  

In addition to increasing the accuracy of sales quantity forecasts, marketers and merchants have an opportunity here to put their data-heads together to streamline the product line architecture based on what resonates with core customer segments. By prioritizing your line around the product affinity of your best customers, you can nurture those valuable relationships that sustain your business while attracting more great customers.


TEST WILLINGNESS TO PAY

Through customer surveys and pricing experiments, you can determine a more nuanced strategy of price increases than simply raising everything by that 15% tariff amount. There may be products in your assortment that could be raised by more than 15% while still maintaining consistent sales, leaving room for other products to take slimmer margins. This step is all about discovering price sensitivity across categories and specific products and adjusting accordingly.

As you might imagine, these three “steps” are not sequential but rather concurrent analyses that affect each other. For instance, if you find a group of products that customers are very price-sensitive on, you may reconsider their importance to your brand. A more hopeful discovery would be when you find those products whose 20% price increase doesn’t faze customers. This information will feed into a more focused demand forecast and product line architecture, not to mention a marketing strategy that knows exactly what products to lead with. 


ELEVATE YOUR BRAND PROPOSITION

This is the advice that everyone wishes were easier to execute, but these tariffs mean that The Big Boys will not only continue to dominate on price, but the gap will widen between what they can offer and what everyone else must charge just to keep the lights on.

Which is why the ultimate goal now should be to not compete on price at all. If you elevate the experience you offer your customers — through products, marketing, branding, service, in-store experience, and surprise-and-delight tactics — then you can change the conversation so that price is a much more minor concern.

To learn more about how you can balance short-term tactics and long-term strategies in service of the goal to change the game so you’re no longer competing on price, check out our book In Discounts We Distrust: Strategies for Success in the Era of Retail Promotional Obsession.

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