Why Smart Pricing Will Help Brands Navigate Tariff

(In collaboration with Mary Kyriakidi, Global Thought Leader at Kantar)

Consecutive economic crises and low consumer confidence can leave brands feeling destined for an uncertain future. Uncertainty is not good for marketers, especially with the constant threat of global tariffs. After years of dealing with high inflation and supply chain issues, brands now face trade wars, the rise of private label brands, and hard discounters. Consumers may abandon their favorite brands for cheaper options, a trend that is already palpable.

In times of change, focusing on profitability is essential. CEOs and CFOs are accountable at the end of the period, but marketers also play a crucial role. They shape price perceptions, influence purchasing decisions, and communicate these adjustments effectively.

Influencing Consumer Perception 

Effective marketing transcends in product promotion and focuses on solving real problems for consumers. The issue of price increases can quickly emerge as a tangible concern. 

Proper pricing strategy not only involves offsetting cost increases; the most competent marketers develop price-focused strategies, aiming to achieve differentiated brand positioning that exceeds consumers’ typical expectations of price equality.

When consumers perceive added value, they are willing to pay a significantly higher price, up to twice as much as the cheapest alternatives. This phenomenon is known as pricing power. Our data indicates that for every additional point of pricing power, a four-point increase in relative price can be justified.

Private Labels and Hard Discounters

One of the most obvious manifestations of economic uncertainty and changing consumer patterns is the rise of hard discounters and private label brands. This phenomenon confirms that many traditional brands have not adequately leveraged their pricing power. Private label brands, with their cost advantages, are catching up with mainstream brands in terms of profits, offering products at significantly lower prices. This competition has led consumers to reconsider their purchasing decisions, opting for more affordable alternatives without sacrificing quality.

Are You Worried About Tariffs and Private Label Brands?

The link between pricing power and price elasticity is firmly established. The more of the former, the less willing people are to buy a lower-priced substitute brand. More importantly, in the current climate, this remains true even amid economic uncertainties and rising costs.

So how do you achieve the optimal price? It's both an art and a science that requires perfect alignment between what you charge and consumer perceptions.

A significantly differentiated brand — meaning those that meet emotional and functional needs and differentiate themselves from the competition — accounts for 94% of a brand's pricing power. Amid the current economic stress, brands must balance demand, revenue, and margin, and consider the impact of pricing strategies on their market share.

With tariffs on the horizon, the need to raise prices is very real. But set them too high and you'll lose volume and revenue. Supply can end up exceeding demand, leaving brands trapped in a cycle of higher costs or excess inventory. We've seen time and again how this leads to changes in consumer behavior, as people become "trained" to buy only on price promotions, a practice that can take years to correct, or they give themselves permission to buy products they wouldn't otherwise try and realize that the differences don't justify paying a higher price and abandon their usual brands.

A long-term pricing strategy requires an investment in brand value and strengthens its equity, which means brands must act now to be future-proof. We studied brands over four years and found that those that improved their pricing power added 67% to their brand value, compared to 33% for others. The effect of pricing power is so strong that even when brands lose market share during this period, an increase in pricing power more than makes up for it later, making it the best way to maintain profitability and business value (and sometimes also maintain marketing team retention).

Softening the Hit

Behavioral experts have shown that the pain centers in our brains are activated during financial transactions, which explains why humans suffer in such situations. That's right, the threat of tariffs is physical, not just financial.

It's unwise to raise prices and expect no repercussions. Implementing a price increase requires a solid strategy that minimizes potential setbacks. A competent marketer will align their brand's interests with those of the consumer and continue to invest in the brand as a value-generating asset to remain the preferred choice. Neither a financial crisis nor a major recession stopped the long lines to purchase the latest iPhone in 2008. This was because Apple clearly communicated to its customers that it had no intention of diminishing the value of its commercial proposition.

But a word of caution: Being blessed with pricing power doesn't authorize a marketer to launch haphazard and unjustified price increases. Speculating on upward prices to maximize profitability can be very dangerous in a context where you're looking for the best value for your budget.

The Perfect Storm

The perfect storm is brewing for those who haven't developed their pricing power. In an environment where consumers are increasingly concerned with maximizing the value they receive for what they pay (and the smaller that difference, the less they will want to pay), a potential tariff war that triggers rising inflation will make consumers hypersensitive. The market will be dominated by those who have cultivated that power with patience and discipline. Those brands that have invested time and effort in strengthening their pricing power will be better positioned to weather the coming economic turbulence. The ability to justify premium prices through a perception of added value will be crucial to maintaining profitability and consumer loyalty in uncertain times.

But marketers must fortify themselves by knowing that acting now will leave them better off. Mastering the art of pricing isn't just about profitability; it's about resilience. No one wants higher prices, but strong pricing power — and a strong brand — does, as these will put brands in a better position when the storm hits.