Earlier this year, the financial impact of tariffs was a great unknown for small and midsize businesses. That changed a few months ago when companies started receiving invoices from their suppliers with new pricing or new costs added -- directly tied to tariffs. Like the first flurries of a dreaded Nor'easter, it was impossible to know then how much worse the tariffs would get or how long they would last.
Today, those questions remain unanswered. But one thing is certain: Tariffs are already freezing the margins of small and midsize businesses and adding to a growing pile of costs.
The Q3 2018 Vistage CEO Confidence Index survey, which captured the opinions of 1,484 CEOs from small and midsize businesses in September, found that 52 percent of companies were "moderately" or "strongly" impacted by tariffs. Our analysis showed that the ratio of companies impacted increased when the data was segmented by revenue and industry.
Companies in wholesale trade, manufacturing and construction are among those hardest hit by tariffs. More than three-quarters (79 percent) of respondents from the wholesale trade said that they were "moderately" or "strongly" impacted by tariffs, followed by 76 percent of respondents from manufacturing and 73 percent of respondents from construction.
The survey also found a correlation between annual revenues and the severity of the tariffs' impact. Among CEOs whose businesses had $1 million-20 million in annual revenue, 42 percent said they were moderately or strongly impacted by tariffs. By comparison, 64 percent of CEOs from companies with annual revenues over $20 million said they were moderately or strongly impacted by tariffs.
Vairous Coping Strategies
In speaking with CEOs about their challenges with tariffs, I keep hearing the same themes: Many have found it difficult to prepare for tariffs because they've been implemented so quickly. Many are facing continual price increases from suppliers and as a result are passing costs on to their customers. Others are rethinking their supply chain and considering whether to reshore production.
Since none of these problems have universal solutions, CEOs are using a variety of strategies to address them. The following tactics, which fall into three areas, are among the most successful and worth considering for your business:
Communicating price increases to customers:
- Turn to reputable sources for the latest news and data about tariffs, and share this information with your customers. This will help affirm the validity of your price increases, as well as help purchasers explain cost increases to their supervisors.
- Be transparent and forthcoming about what's happening and why. Use price conversations as an opportunity to build trust with your customers.
- Ensure that your price increases are fair to your customers. Don't be tempted to take advantage of the situation and raise prices beyond what's reasonable.
- Consider raising your prices gradually and in smaller increments. This will help lessen the blow for your customers and show that you care about them.
Negotiating with customers:
- Be flexible and thoughtful about price increases. Consider the extent to which your customers can pass on costs to their customers without sacrificing demand.
- Ask yourself whether it makes sense to negotiate on factors besides price. For example, explore whether you can modify your product or service and still meet a customer's need and budget.
- Know your limits. Don't hesitate to pass on all price increases if that's what your business needs to remain viable.
Planning for 2019 without knowing the future of tariffs:
- Make educated decisions based on how your company performed this year. For example, make inventory purchases based on the assumption that your sales will be equal to or slightly less than sales in 2018.
- Build in a price buffer when bidding on a project. This will give you a safety net in case prices skyrocket in the new year.
- Scrutinize your costs and be ruthless about cutting expenses. This will put you in a better position to cope with a worst-case scenario, should it arise.
If tariffs haven't directly impacted your business, they may still harm it indirectly. Tariffs are expected to have a ripple effect across the economy as they increase the price of many consumer goods. Over time, this will raise the cost of everything and cause customers to hunker down on spending. Translation: Fewer people will want -- or are able -- to do business with you.
Meanwhile, threats of a trade war are still brewing, and no one knows what the next wave of policy decisions will bring. As a CEO, you must remain vigilant in preparing for what's next -- or risk getting caught in the storm.