How Businesses Should Adjust Pricing in Response to Tariffs

Dan Cakora

02-05-2025

The global economy is reeling as the Trump administration discusses enacting tariffs on major trading partners — China, Canada, and Mexico — affecting more than $1 trillion in imported goods. Although action against Canada and Mexico has been paused, these proposed tariffs are significant: 25% on all goods from Mexico and Canada, 10% on Canadian energy, and 10% on Chinese imports. China has already retaliated with sweeping tariffs on U.S. goods, and Mexico and Canada could follow suit.

U.S. businesses face uncertainty as tariff negotiations continue, as the timing and scale are unclear. If implemented, these tariffs will drive up costs, making price increases necessary to protect margins. However, raising prices too aggressively could push away customers still recovering from pandemic-era inflation. So, how should businesses respond now?

1. Recognize Short-Term Pricing Power

First, take a deep breath. Many companies discovered during the pandemic that they had more pricing power than they realized. From January 2020 to the end of 2024, the Producer Price Index — which measures the selling prices received by domestic producers — rose over 22%. This is evidence that cost increases can successfully be passed through to price. In the short term, price elasticity will be low, meaning customers have few immediate alternatives and must accept price increases. However, as time passes, they will adjust, making long-term pricing decisions more critical.

2. Quantify the Financial Impact

Before acting, calculate how tariffs will affect your profitability to avoid improper reactions. Consider this simplified P&L example where half of a company’s materials face a 25% tariff-driven cost increase:

Financial impact analysis of tariffs and price increases on revenue and expenses.

	Current State	Post-Tariff		Post-Price Increase
Revenue	100	100		107.5
COGS
Cost of Materials	60	67.5	12.5%	67.5
Product A	30	37.5	25.0%	37.5
Product B	30	30	30
Inbound Freight & Logistics	5	5	5
Warehouse & Handling	2.5	2.5	2.5
Total	67.5	75	11.1%	75
Gross Profit	32.5	25	-23.1%	32.5
Operating Expense
Sales & Marketing	3.5	3.5	3.5
General & Admin	10	10	10
Outbound Freight	3	3	3
IT & Software	1.5	1.5	1.5
Bad Debt Allowance	0.5	0.5	0.5
Total Operating Expense	18.5	18.5	0%	18.5
Other Expenses
Depreciation & Amortization	2	2	2
Interest	1.5	1.5	1.5
Taxes	2.5	2.5	2.5
Net Profit	8	0.5	-93.8%	8

The 25% increase in the cost of Product A results in an 11.1% weighted increase in COGS, causing net profit to plummet by nearly 94% if no action is taken. To restore profitability, the company must implement a 7.5% price increase (shown as an improvement in revenue), which is less than the 25% tariff itself. This assumes complete short-term price inelasticity — something that won’t hold indefinitely.

3. Implement Price Increases Quickly

Clearly, a price response is unavoidable. Whatever percentage is chosen, act swiftly. This round of tariffs may be the opening salvo in a trade war, so delaying price increases could erode margins further.

4. Communicate that Price Hikes are Temporary

Transparency with customers will be critical to maintaining customer relationships. According to CBS News exit polls, 75% of voters in the last presidential election reported experiencing moderate or severe financial hardship due to inflation, with 45% feeling worse off than four years ago. Although short-term pricing power still exists, the market will be much less accepting of capricious or heavy-handed increases. Prolonging tariff-related price increases beyond what is necessary risks damaging long-term customer relationships.

Tariffs create uncertainty. Businesses that act decisively can protect their margins while maintaining customer trust. By understanding the financial impact, implementing quick price adjustments, and clearly communicating with customers, companies can walk the tightrope and maintain profitability and customer retention. The key is to act decisively — waiting too long to respond can be far more costly than the tariffs themselves.