Reducing complexity of tariffs in price management

This article first appeared in Supply House Times online and print edition. (September 2020 Issue)

The impact of tariffs on pricing models can significantly complicate price management. Without proper handling, trade policy changes can not only put companies at risk for non-compliance, but also compromise their margins, volume and competitive advantage.

Understanding the impact of tariffs on pricing models

Tariffs — taxes on imports or exports — are based on agreements between sovereign states. They also serve as a form of foreign trade policy regulation to protect or encourage a domestic industry and are typically paid first by the importer before being passed on to the buyer. Harmonized Tariff Schedule (HTS) codes, which are numerical identifiers that an exporter assigns for a group of products, are critically important for distributors and manufacturers to track. Monthly changes to HTS codes can spell trouble for these types of industrial companies if they’re unable to keep track of updates, particularly as different manufacturers of the same goods can sometimes assign different HTS codes. If costs are not updated correctly, mistakes can result in large fines or major margin losses. Therefore, keeping pace with tariff updates and HTS code administration can require tedious oversight and significant team resources.

Pricing models are already complicated enough without the added complexity of tariffs. Grappling with cost pass-through decisions — such as how much cost to pass onto customers, how sales representatives should explain and negotiate price increases and what the impact to margins could be — cannot be easily solved with traditional pricing tools. The best approach to maintaining margins, volumes and remaining compliant with audit requirements for tariffs is to leverage a market-aligned, flexible price management tool that provides:

Team access to a central data repository of product data and tariff information; Clear visibility into how tariffs are applied across products; The ability to calculate the impact product by product and customer by customer, as well as the overall change automatically; Integration with other tools or existing price administration applications; and The ability to communicate an informed strategy and deliver relevant and defensible price guidance to sales representatives.

Pricing strategies to maintain margins

In an ideal world, 100% of the higher costs from tariffs could be passed on to customers. In reality, different price elasticity and competitive dynamics must be taken into account when determining cost pass-through options to avoid the loss of margin, volume or even customers.

Today’s flexible price management and optimization solutions consider multiple variables that test goal-seeking and “what-if” scenarios and can execute price changes quickly on a massive scale. For example, more than 100% of higher costs from tariffs could be passed onto customers who have low price sensitivity, which could help offset cost increases on customers with higher price sensitivity. Calculating the price elasticity of thousands of various micro-segments can ensure more precise pricing decisions that meet customer expectations while maintaining necessary margins.

Tools available today can also solve for HTS updates, where centralized data repositories monitor product additions or exclusions to eliminate guesswork and allow the pricing department to better manage cost changes and maintain margins. The pricing output can also be provided to sales teams as a range of prices, giving them the ability to negotiate more effectively and reduce natural tendencies to override prices or establish unwarranted special price agreements for certain customers.

Advances in current pricing software offer countless benefits for improving productivity, maintaining compliance with tariff policies and maximizing margin, volume and competitive advantage. However, it’s important for distributors and manufacturers to consider the best approach to tailoring flexible price management tools to the company’s own unique needs, and ensure they have the right supplier who is fully invested in their success and can go beyond implementation.