Tariffs (Again)

Note: If you missed Adam’s “emergency” newsletter on Tariffs Wednesday, it’s worth reading. It’s a guide on how to approach raising prices, cutting offers and adjusting shipping rates. You can find it here.

I think it’s possible to weather this storm. 

It feels a little weird—and might even seem out-of-touch—to write that, but I keep coming back to this worksheet I created. The goal of it (you can take a look at it here and make a copy for yourself, if you want) was to figure out how a brand might buy itself time to figure out its supply chain. And there’s a place for optimism (even if this whole thing is an incredibly frustrating situation).

The framing here is best viewed through the lens of the fact that a 5% price increase can lead to a 50% increase in profits. 

I’ve shared this graphic with folks before and, because the above is so counterintuitive, it always gets a “holy shit” level reaction:

There is a ton of nuance in this, of course, and the lower your profit margins, the more you have to gain from a price increase. Because all of that price increase flows to your bottom line. (I’m not guaranteeing that for you, but I’m saying it is possible.)

So, about that spreadsheet: We’ll walk through the numbers some, but I’ll preface this by saying a lot of the assumptions in this spreadsheet are based on our experiences. We’ve spent a lot of time focused on price and offer testing, so we’ve got a lot to pull from. And while that experience hasn’t come in the face of 100%+ tariffs on the country our industry relies on most, I think it’s still instructive. 

Here’s what unit economics look like in a pre-tariff world: 

There’s not much color to add here, other than the preface from above. We’re using some benchmarks and anecdotal experience to build this out, and if you feel strongly about my generalized assumptions being different from your reality, you can edit this document and play along at home.

And here’s what unit economics look like post-tariffs:

Brutal. Tariffs (modeled at 35% here) singlehandedly reduce contribution margin in this scenario by 70%. (I realize, obviously, that if you source exclusively from China, this scenario is far, far different. In this scenario, the 145% tariffs mean your contribution margin would be about 3X  worse.)

A response here, where contribution margin gets tighter might be to cut costs to get back to “normal.” That would look like this: 

For most brands, a 33% cut to OpEx would be incredibly painful. Everyone is already running lean and software spend doesn’t feel like it’s risen too much following the cuts a couple years ago. That means layoffs. Relying solely on OpEx cuts would be a net-negative for the industry.

This isn’t just painful for everyone, it’s hard to do and hard to change course on. The amount of time needed to recover from this is the amount of time needed to “undo” all the cuts. That’s time-consuming and also costly from an opportunity cost perspective.

Here’s what some achievable changes to pricing, offers and shipping rates look like:

In this scenario, we’ve raised prices by 8%, reduced our discount rate (probably doable just by optimizing abandoned cart and lapsed customer offers), and added an extra dollar to our shipping costs. 

Even if our conversion rate fell by 30%, we’d still end up level with our pre-tariff world: 

Which of these feels better? 

From our experience, most prices and offers are far from optimum, and our data shows that the likelihood of a variant winning in a price test is almost twice as likely as a variant winning in a traditional CRO test. There’s “alpha” here, as weird as that may sound right now.

To me, looking at this worksheet, the plan is straightforward: Yes, cut whatever wasteful spend you have and probably get a lot more skeptical on other spend that doesn’t seem wasteful. But be careful there. (You can’t cut your way to growth.)

Instead, look at the places you haven’t spent the last several years optimizing: Your prices, your offers and your shipping rates. 

These three places alone can cover either the entirety or the bulk of your tariff costs. It’s unavoidable, but it’s also the fastest, least painful path.

This isn’t easy. Every brand’s situation is different, and some might not have the time. That’s the most upsetting part of all this. But for everyone else, it’s worth moving fast on it.