Tariffs

Note: We’re adding a newsletter issue this week to address tariffs. We’ll still publish Saturday, but this topic feels too big and important to wait.

A few months ago, when tariffs were originally announced (those 10% tariffs on China seem quaint now) we wrote about tariffs without explicitly mentioning them.

I won’t be as coy this time. Tariffs pose a tremendous threat to ecommerce businesses; It’s hard to see how these tariffs aren’t entirely inflationary. Everyone is staring at huge COGS increases, practically overnight. And while there are long-term approaches to combatting them, the only real short-term approach is to raise prices so that you can reclaim your lost margin.

Drew and I have been thinking about pricing strategies for over a decade, so this newsletter (regular readers will recognize this as being earlier in the week than normal) is way more tactical than usual. I’m sorry about that, but I also wanted to share a bunch of thoughts on how to respond to tariffs via profit levers. 

1. Run a 90/10 holdback test. 

There is no way around it: You’re likely going to raise prices right now. In any price increase scenario, the extra revenue generated goes right to the bottom line. Even a small percentage change can have a large impact on margins.

Begin by testing your price increases, allocating higher prices to 90% of your audience so you can grab as many profit dollars as possible—while still getting some learnings about elasticity out of it. (If you’re currently selling through existing inventory that’s not subject to tariffs, this also has the benefit of generating more profit now to help pay Uncle Sam later.)

2. Take a portfolio approach.

Not every product is going to have the same elasticity profile. You may have way more pricing power on some products than others. Instead of raising prices uniformly on all products, you can take a portfolio approach to your products.

If, for simplicity’s sake, raising prices on some products tanks conversion on those while a comparable price change on others doesn’t affect conversion, take the extra margin on the products where people are willing to pay more! 

3. Test multiple price points.

Price elasticity isn’t continuous. If you raise your prices from $27 to $30, people may not notice (or care). Your conversion rates might stay steady. But if you raise prices from $27 to $35, people might notice and might not buy as much.

There are quite a few ways to maximize price within the elasticity range (end your prices in .99, for instance), but getting more plot points on the curve will help you understand how much room you have to play with.

4. Plug in different COGS assumptions.

This is a super fluid global trade environment, with retaliatory tariff responses and negotiations to reduce tariffs. Even outside of that, you’re likely looking at moving operations somewhere with lower tariffs.

A worse-case scenario will necessitate a different price point than a better-case scenario. You should know both, even if they’re only directionally accurate. We just posted our elasticity simulator, play around with it! (Disclaimer, this is the work of a 2-hour AI hackathon, but what it lacks in sizzle it makes up for with steak.)

5. Test regularly, maybe monthly.  

Or something close to monthly. As much as the global trade environment is fluid, the industry-level environment is equally in flux: Some brands and retailers have warehouses full of inventory that won’t subject them to tariff implications for months, meaning they may not raise prices for months. Some brands are dealing with massive changes already, and have already raised prices.

Consumers are going to be dealing with rising prices in a series of waves, not one, fell swoop. Today’s answer on the optimum price is likely to be different than the answer a month or two from now. 

6. Explore shipping rates.

Some brands that struggle to raise prices have been able to effectively pass the tariff costs into shipping rates. Telling your customers you’re doing it is an option, too. And maybe, just maybe, the free shipping option goes away.

Shipping is an under-explored, but high-leverage profit lever that’s easy to test and usually doesn’t require as much internal buy-in to tackle. Though there’s more limited upside here (when compared to price testing), it can also serve as a quick win or a good alternative to a price sensitive consumer.

7. Test your discounts and offers.

Discounts and offers more generally are similar to shipping rules and thresholds in that they’re not tested frequently. Now is a time to find out if the offer making is driving incremental profit.

This (like all these bullets, really) is probably a newsletter in and of itself. There is a lot of ground to cover here, and you might be able to start with more well-established buyer psychology studies (the “Rule of 100,” for instance, suggests that dollar-based discounts are perceived as better value when a price point is over $100).

8. Be transparent.

At Intelligems, we believe firmly in price transparency. What this means is helping your customers understand why something costs what it does. Including messaging on your site or on a product can earn trust with your customers and help them rationalize the cost. (We built a free app that itemizes the tariff for each line item, which you can install here.)

9. Send an email to your customers.

You should let your customers know that you’ll be raising prices. Doing so might pull forward demand, which could help you clear inventory you have now, but also provide you some cash relief for tariffs you’ll need to pay before you can sell your next shipment. Caveat is if you’re trying to make your current inventory last this may be counter-productive.

10. Don’t try to find a perfect answer.

I’ve heard executives at brands say, “We don’t want to change prices twice, so we have to get it right the first time”. I don’t subscribe to the same line of thinking. This is a tremendously difficult and complicated problem. It will also change several times in a short period of time. So, don’t try to solve it in one shot. Be willing to try something now and adjust later.

Solving incrementally and testing frequently is the fastest path to finding a solution to a problem.

You made it this far

Of all the challenges this industry has faced in the last five years, this feels to be among the biggest. Many are in survival mode. 

That feels bleak and even a little upsetting to write, but it’s also something to feel optimistic about. Thank you for reading this far. If you come out the other side of this, you can weather any storm. That is powerful.

The best way to survive, though, isn’t to react; it’s to respond. Take a breath, make an informed plan, execute better than you ever have before, and you’ll come out the other side stronger than before.