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Tariffs: What they mean for your pricing strategy | Canadian Manufacturing

While there is great uncertainty at this stage as to what, how large, and where tariffs will be imposed, one thing is certain: price adjustments will likely result.

To make pricing changes that best respond to this new environment, you need to take into account four factors:

1. Impact on Costs

As a first step, you need to think about the impact that tariffs will have on your costs. Two factors to consider include:

The percentage of your product costs that will be impacted by tariffs.

If you’re a small auto parts manufacturer such as metal stamping, your material costs are unlikely to be significantly affected by tariffs. In this case, suppliers will likely be domestic and they in turn are unlikely to face tariffs. On the other hand, if you’re a larger competitor such as Linamar with products crossing the border several times during the course of production, steel and other tariffed materials may account for up to 10-15% of costs. And, this depends on how many times the border is crossed, the relative percentage that the tariffed materials represent, and the exemptions to tariffs that are specific to the items.

Your supply chains.

If your supply chain involves sourcing from providers whose goods and materials may be subject to tariffs, you need to evaluate if and where there are alternatives. Specialized medical devices companies that depend on particular advanced sub-components may have few alternative sources. However, other companies such as food manufacturers may have alternate sources of supply. If you depend on steel or other products that are or could be tariffed, globalization means that alternate supplies should be explored.

If there are few alternatives or capacity is significantly limited, then expect costs to rise even more severely than would be indicated by the tariffs only. In this case, you should aim to lock in margins and generally reduce uncertainty by seeking long-term contracts with suppliers and buyers.

2. Customer responses to price

Customers’ responses to price vary depending on the relative value they ascribe to your products and their ability to source elsewhere. If your product is key, cannot be easily substituted, or switching represents a significant risk, then customers will likely be less price sensitive. For example, U.S. health regulations make switching products difficult and, together with high profit margins, these make medical products and devices less price sensitive even though some components that go into these products may be subject to tariffs. Conversely, if there are readily available substitutes, customer margins are tight, or you sell large volumes that are not critical to their own activities, expect price sensitivity

Certain products such as specialty steel, may also qualify for tariff exemptions so that in such cases, prices would not be impacted. However, the process is highly risky and as of the end of July, there was a backlog of an estimated 16,000 applications. In addition, decisions are notoriously inconsistent. For example, Shell applied for tariff exemptions for high-specification steel pipes from Nippon Steel for deep water oil and gas production. The Commerce Department ruled that 3.5 inch tubing was acceptable, but not 4.5 inch tubing.

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Tariffs: What they mean for your pricing strategy – Canadian Manufacturing.