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The issue of determining retail prices using the “cost of goods plus markup” formula has always been a delicate balancing act. However, in the current era of tariffs, this balancing act has become even more challenging.
Since January, trade policies under President Trump have been constantly changing, making it difficult for retailers to determine the actual cost of goods. With consumers already hesitant to spend on non-essential items due to economic challenges, retailers are facing the additional pressure of setting prices that won’t alienate price-conscious customers.
Ali Furman, Consumer Markets Industry Leader at PwC, points out that retailers need to carefully consider their pricing strategies in light of these challenges. Unlike previous tariff situations, passing on price increases to consumers is now a more complex decision due to changing consumer behaviors.
Walmart Leads the Way
Import taxes are typically paid by the retailers, and so far, most retailers have refrained from raising prices on inventory purchased before tariffs were implemented. Walmart’s recent commitment to keeping prices low, even at the cost of operating margins, is setting a trend that other retailers are likely to follow.
Matt Pavich, Senior Director of Strategy and Innovation at Revionics, emphasizes the importance of prioritizing customer satisfaction over short-term profits. By maintaining competitive prices, retailers can retain customer loyalty and ultimately increase their profits through higher sales volume.
Adapting to the Changing Landscape
As inventory costs rise, retailers must carefully assess whether to pass on these costs to consumers and how much of the increase to absorb. Technology plays a crucial role in helping retailers make informed pricing decisions based on data analysis and market trends.
“No retailer wants to be the one that’s called out on social media as gouging the consumer.”
For smaller businesses like Dutch & Bow, a women’s apparel boutique, the decision to adjust prices based on tariff impacts is a critical one. Retailers need to consider consumer perceptions and price sensitivity when making pricing decisions to avoid losing sales.
Strategies to Mitigate Tariff Risks
As tariffs continue to affect prices, retailers have various options to offset these impacts. By reducing other costs, adjusting pricing strategies based on product elasticity, and exploring private label development, retailers can navigate the challenges posed by tariffs.
Effective communication with both suppliers and customers is key to maintaining transparency and trust during price adjustments. Retailers need to educate consumers about the external factors, like tariffs, influencing price changes to manage expectations and build brand loyalty.