I know. This sounds dramatic. However, I swear this is something I have been studying and thinking about for decades. To explain where I come from, I need to get a little academic. Don’t worry, I’ll make it simple.
First, as business people, it’s important for us to recognize that what we are taught in business school is not always what we see in real life. For instance, let’s talk about ECON 101. We are taught that markets are efficient and price and volume are directly correlated. Well, for those of us that do pricing for a living can emphatically tell you, for most B2B companies, this is absolutely not true.
Let’s consider the typical chart we expect to see based on our basic understanding of economics. Volume neatly and tidily increases as price decreases.
But pricing professionals will tell you, the reality is much messier. In fact, in the vast majority of B2B companies, if we create a scatter plot of customer price levels vs the volume that they purchase, we find what pricers call the “pricing funnel”.
Why does this market reality exist? It happens because as companies or products work through their life cycle, most companies change how they price new customers, but they tend to not actively manage their legacy customers at the same rate. After all, it’s much harder to tell a purchasing customer that their prices are going to increase 10%, than it is charging a new customer that premium who doesn’t realize it’s a 10% higher price.
Of course, there is also the propensity of sales representatives to overpromise or overestimate a new opportunity (“this is going to be a million-dollar account”), only to discover the customer only purchased $100, 000 of product a year later. Most companies are inherently lazy when it comes to going back to the customer and explain “you got a million-dollar price for a hundred thousand dollars of spend – you owe us”. So that customer becomes a dot on the pricing funnel in the bottom left-hand corner (a small customer with low prices).
Not all small customers get low prices – many do pay premiums. So herein lies the problem with how most companies will be executing tariffs. They will be applying flat percent price increases or $ increases across all customers. In theory, one might expect the prices of the entire funnel to simply move up the scale.
That’s not actually what’s going to happen though. Large customers with pricing power will fight back and some will have their price increases held or reduced. Which leaves companies with no choice but to target the small customers. If all of them are targeted the same, those customers who pay the highest prices are the ones at risk. They are already at the top of the price / value relationship. You move them up, some will reluctantly take it, some will exit and try to find another supplier, and others will simply not be able to do business any longer.
These are the companies I worry about. Many of these are small businesses with less pricing power that have been the backbone of the US economy. They are at risk right now.
And it is not just them! The companies that sell to them that are counting on the tariffs to land are also at risk – because when their high priced customers leave, the average prices of the portfolio goes down. This is a failed implementation of tariff recovery!
Said another way, most companies are at risk of inadvertently losing their high profit customers while trying to pass through tariffs equally – which could result in them actually landing in a place where average prices were less than when they started.
So how can big companies pass along tariffs in a fair way that won’t damage their own customer base? Clean up the low-priced small customer deals by increasing their prices more than those that are paying higher prices.
It’s really that simple. By treating high priced and low priced customers differently in tariff recovery, companies will see better attainment of the effort at the same time they do some good for the industries they play in!
No one feels great raising prices to their customer base at the level necessary to cover tariffs, but this is one action companies can take immediately to help out some small guys. I see it as a Patriotic move to help small business owners maintain their American Dream.