Navigating the impact of tariffs on pricing strategies

Learn how tariffs reshape pricing and commercial strategies – and explore smart ways to stay competitive in volatile geopolitical contexts.

In brief

• Tariffs disrupt global trade, requiring businesses to adapt their strategies to maintain competitiveness.
• Companies should view tariffs as opportunities for strategic growth, rather than mere obstacles.
• Avoid panic. Focus on rationalizing short-term actions without jeopardizing carefully considered commercial strategies.

Tariffs are once again at the forefront of global trade discussions. As tensions between major economies escalate, new tariffs are being imposed at a pace that challenges even the most agile business strategies. These taxes on imported goods can dramatically reshape supply chains, pricing strategies, and market competitiveness.

It's true that, when tariffs emerge, businesses often struggle to determine the best course of action. How can they safeguard their operations against uncertainty? How can they strengthen their position and navigate the turbulences to emerge on top when waters calm down?

However, before making high-risk, rash decisions with long-term impacts, companies should take a step back and assess how to minimize exposure by understanding customer behavior and willingness to pay. Let’s start by building a clear understanding of what tariffs really are and how they work, so you can make the right commercial decisions.
 

Tariff trade-offs: why governments can’t have it all

A tariff is a tax on imports, designed to make foreign products more expensive and protect domestic industries. However, tariffs serve multiple strategic objectives for the politicians, encapsulated in three R’s: Revenue, Reciprocity, and Restriction.

While tariffs can be structured to meet any of these goals, they cannot effectively achieve all three simultaneously. Optimizing for one always comes at the expense of another, creating strategic trade-offs. U.S. trade policy appears to disregard this fundamental trade-off, frequently shifting between the three Rs—even with the same trade partner—without a consistent strategic reasoning.

Revenue
Tariffs generate income for governments, particularly appealing during budget deficits. However, prioritizing revenue can strain trade relationships and economic efficiency. A revenue-driven tariff typically keeps rates moderate to maintain steady import flows.

President Trump has suggested that tariffs could generate enough revenue to eliminate income taxes altogether¹. Yet, tariffs have not been a significant revenue source for the U.S. government since the early 1900s, now hovering around just 2% of total revenue. An across-the-board 70% tariff would be needed to replace individual income tax revenue—an assumption that ignores inevitable shifts in consumer and producer behavior².

Reciprocity
Tariffs function as a bargaining tool in trade negotiations, pressuring other countries to lower their own trade barriers. Effective reciprocity requires tariffs to be high enough to create leverage but not so high that they harm domestic consumers or businesses. This strategy often leads to retaliatory tariffs, fueling escalation.

President Trump has proposed mirroring the tariffs imposed by other nations, such as India’s 9.5% duty on U.S. products compared to the 3% duty the U.S. imposes on Indian goods. Aligning tariffs this way could place pressure on key Indian export sectors like textiles and pharmaceuticals—industries that contribute to India’s $46 billion trade surplus with the U.S.³

Restriction
Some tariffs are designed purely to limit imports and shield domestic industries. While this helps local businesses compete, it also raises consumer prices and can lead to supply shortages. A highly restrictive tariff sacrifices revenue and often provokes trade retaliation. Canada’s dairy tariffs, for example, employ a supply-management model that allows a limited quantity of imports at minimal tariffs before significantly higher duties apply.⁴

Governments must carefully weigh these competing objectives as this is truly a strategic juggling act. Shifting between them too frequently is counterproductive. A tariff optimized for revenue, for instance, won't be restrictive enough to fully shield domestic industries. Conversely, a tariff with restriction at its heart won't generate significant revenue as imports will take a nosedive. And a tariff with reciprocity as its main aim may need constant tweaking as negotiations advance, making it an unreliable source of revenue or protection.

However, adopting a value chain approach could potentially allow for a mix of these objectives: Revenue on steel, Restriction on cars, Reciprocity on rare earth elements, for example. This approach could offer a more nuanced and effective tariff strategy.

Going back to the basics: understanding the value perception

Tariffs do more than raise costs—they disrupt competitive dynamics by affecting businesses unevenly. In theory, if all competitors in a given market face identical tariffs, the price increase would be absorbed across the board, leaving market shares relatively stable. In reality, tariffs impact businesses asymmetrically. Domestic manufacturers may avoid these added costs, gaining a pricing advantage over import-reliant competitors. Some companies may find themselves forced to adjust (in those cases where pricing is the key determining purchase factor).

To respond effectively, understanding how customers perceive value is key. Some consumers are highly price-sensitive and will quickly switch to cheaper domestic alternatives, while others prioritize factors like brand reputation, quality, or unique product attributes, making them more willing to absorb price increases. Companies that understand these dynamics can make strategic choices, rather than reacting blindly to cost pressures, when determining whether to absorb costs, adjust pricing, or rethink their market approach altogether.

This is about more than just pricing. A deep understanding of value perception informs whether a company should invest in localization, diversify its supply chain, or even exit a market entirely. A brand with strong customer loyalty and pricing power may find that it can pass costs along with minimal disruption, while a commodity business competing on price alone could face an existential threat. The companies that thrive in a tariff-driven world are not simply those that tweak pricing models but those that proactively refine their go-to-market strategy, realign value chains, and build resilience against future geopolitical shifts.

Rather than treating tariffs as an external shock to endure, companies should use them as a strategic inflection point. This moment presents an opportunity to strengthen market intelligence, rethink cost structures, and position for long-term advantage—turning disruption into a catalyst for smarter, more adaptive decision-making.

Smarter inventory management: preparing for market shocks

When tariffs loom, inventory management becomes critical. Businesses must decide fast whether to stockpile goods before tariffs take effect. For many tariffs, however, you are already too late. Remember the 3 Rs? When tariffs are implemented with the main purpose of reciprocity (i.e. as a bargaining chip in negotiations) deadlines are announced in advance and the tariff generally doesn’t take immediate effect.

Stockpiling can be a smart short-term strategy. During recent trade disputes, many retailers and manufacturers rushed to import goods before tariffs hit, securing stock at lower costs. Belgian brewers, for example, increased inventory when the U.S. threatened tariffs on European alcohol. Brewery Huyghe, known for their Delirium Tremens, decided to immediately ship 20 containers overseas when President Trump announced a 200% tariff on European alcoholic beverages. They feared that this tariff would lead to 3x price surge. With this inventory decision, they will soon hold a stock for about 6 months and will see in a few months’ times when and how the tariff is implemented.

This strategy works well in the short-term, yet carries risks to be accounted for, including storage costs, shifting demand, and the potential for tariffs to be lifted before inventory is depleted. While smart, the harder part of this approach is not only keeping prices stable while depleting stocks but also preparing the market, by slowly infusing slight price changes to cushion the ‘tariffs shock’. In contexts where all suppliers have stocked-up, the risk of price wars is also much higher, thus it is key to resist the urge of following competitors that would lower their price to win market share.

Strategic pricing adjustments

When tariffs hit, businesses must decide how to adjust prices without jeopardizing competitiveness. While several pricing strategies exist, each comes with trade-offs that can shape long-term market positioning.

Absorbing the cost: the ostrich approach
Some companies choose to absorb tariffs, taking a direct hit to margins in the hope of maintaining customer loyalty and outlasting competitors. This approach can work under specific conditions—such as when a company has deep financial reserves, enjoys a dominant market position, or expects the tariff to be short-lived. For example, BMW is ‘price protecting’ certain Mexican-built models that would be subject to tariffs.⁵ However, this strategy is often a recipe for disaster, particularly for companies with weaker financials or in industries where price sensitivity is high. Ignoring tariffs without adapting—akin to an ostrich burying its head in the sand—can erode profitability and leave businesses vulnerable to more agile competitors.

Passing the cost to customers: making it work
Raising prices is another option, but success hinges on whether customers perceive enough value to justify the increase. Transparent communication plays a crucial role—customers are more accepting of price hikes when they understand the cause. Some businesses use markups as a temporary measure, implementing structured price adjustments that can be rolled back if tariffs are lifted. Many manufacturers, for example, have historically framed price increases around rising material costs, allowing them to recalibrate pricing later if conditions improve.

Differentiated pricing: a long-term advantage
A more strategic response is differentiated pricing, which identifies and targets customer segments that are less price sensitive. Rather than applying blanket price increases, companies can realign their pricing structure to emphasize premium products or high-margin segments. This strategy is not just a short-term fix; it creates lasting advantages by uncovering hidden pricing opportunities that exist even in the absence of tariffs. Many companies have historically used external shocks—such as raw material price hikes or currency fluctuations—as an opportunity to refine pricing strategies that better align with customers’ willingness to pay and value perception. In this sense, tariffs can be an excuse to implement overdue pricing optimizations across an entire product portfolio.

While no single approach is universally effective, companies that treat tariffs as a strategic pivot—rather than a reactionary cost burden—will be better positioned to emerge stronger in the long run.

The shifting landscape of global value chains

While pricing adjustments can offer short-term relief, long-term resilience requires a more fundamental shift: rethinking value chains in the context of global geopolitical movements. For the past 30 years, the pendulum of globalization swung toward deep international integration, prioritizing cost efficiency above all else. Today, that pendulum is swinging back, as geopolitical tensions and trade policies push economies towards regionalization and economic blocs. Value chains will naturally evolve in response, reshaping how companies manage sourcing, production, and distribution.

Sourcing diversification
One of the most effective ways to reduce tariff exposure is sourcing diversification—building relationships with suppliers across multiple regions to mitigate reliance on any single country. The U.S.-China trade war highlighted the risks of overconcentration, as businesses dependent on Chinese manufacturing faced sudden cost spikes and supply chain disruptions. In response, many companies have shifted portions of their production to Southeast Asia, Mexico, or even back to domestic factories to hedge against geopolitical risks.

Localization
Localization is another strategy gaining momentum. Some companies are reshoring or nearshoring production to bypass tariffs and reduce geopolitical uncertainty altogether. While this approach isn’t always the cheapest in the short run, advancements in automation, supply chain efficiency, and government incentives have made local manufacturing more competitive.

In an era where economic alliances are redefining trade flows, companies must align their value chains with these evolving realities. Those that anticipate and adapt to the shifting geopolitical landscape will be better positioned to navigate future trade disruptions and secure long-term competitive advantages.

When to exit a market—or hold your ground

In some cases, tariffs make a market unsustainable. If a product becomes prohibitively expensive and domestic competitors have a strong foothold, scaling back or (temporarily) exiting may be necessary. However, such decisions should be made carefully, based on a thorough analysis of customer demand, competitive positioning, and long-term potential.

Certain conditions may signal that an exit is the most strategic move. If a company has maintained a consistently low market share with little to no growth over time, the likelihood of overcoming tariff-induced disadvantages is slim. Similarly, if initial investments in the market have been minimal, the cost of withdrawal may be relatively low, making an exit more feasible.

Tariffs may also accelerate pre-existing challenges—such as declining product categories facing disruptive competitors—where the market was already shrinking due to innovation or shifting consumer preferences. In such cases, maintaining operations despite unfavorable trade policies may only delay the inevitable. Consider tariffs as an opportunity to optimize your cost base and redesign your product & service portfolio.

On the other hand, sometimes the best move is to wait it out and apply strategic patience. Tariff policies are politically driven and frequently change, and businesses that panic and pull out too soon may find themselves struggling to regain footholds if conditions improve. Some companies, for example, have historically maintained brand presence in key markets through economic and political turmoil, prioritizing long-term brand equity over short-term cost savings. For companies with strong brand loyalty, entrenched distribution networks, or high sunk costs in the market, weathering the storm may be the smarter long-term play.

That said, doing nothing is rarely a viable strategy. Waiting without a clear plan, ignoring fundamental shifts in market dynamics is obviously not advisable. Whether a company chooses to exit, hold its position, or adapt its strategy, the key is to act with intention.
 

Research your value proposition and associated pricing power

Tariffs are market shocks that demand thoughtful responses. Knee-jerk reactions—like dramatically raising prices, shifting production hastily, or pulling out of markets—can do more harm than good. Instead, businesses must analyze customer preferences and willingness to pay, refine their pricing strategies, re-evaluate product portfolio optimizations and assess the feasibility of value chain diversification.

The most successful companies will be those that use data-driven insights to make informed decisions, communicate their value effectively, and remain adaptable in the face of uncertainty. Whether through pricing adjustments, supply chain restructuring, or strategic patience, businesses that take a calculated approach to tariffs will be best positioned for long-term success in an unpredictable global economy.