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Tariff Pricing Explained: A Guide to Planning for Uncertainty

Sabrina Parsons

6 min. read

Updated April 18, 2025

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Understanding tariffs and their impact on your pricesA practical example: The coffee shop dilemmaThe anti-panic plan: Financial modeling for tariff pricingFinding your new price point: Modeling price adjustmentsFrom uncertainty to action

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Understanding tariffs and their impact on your pricesA practical example: The coffee shop dilemmaThe anti-panic plan: Financial modeling for tariff pricingFinding your new price point: Modeling price adjustmentsFrom uncertainty to action

Let’s face it—tariffs and economic uncertainty have become our new normal. Every day brings another headline about trade policies. It’s enough to leave any business owner staring at the ceiling at 2 a.m. wondering how the next news cycle will affect their bottom line.

But even in the face of tariffs and rising costs, owners don’t have to just sit back and wait for their business to be impacted.

Instead of making gut decisions based on fear (or doing nothing at all), they can use financial modeling and what-if scenarios to understand the precise impact of any price fluctuations. And they can use those financial projections to make better decisions. Think of it as turning on the lights in a dark room—suddenly, what seemed scary becomes manageable.

Read on for my step-by-step framework to analyze tariff impacts and adjust your pricing with more confidence.

Understanding tariffs and their impact on your prices

So what exactly is a tariff? Basically, it’s a tax. Think of tariffs like a toll booth for products that enter the country. When tariffs are imposed, the businesses that import products from other countries have to pay an added fee based on a certain percentage of the import’s value. Then it’s up to those businesses to decide whether to absorb that extra cost or pass it along to consumers. Often, they’ll do some of each.

Due to the U.S. president’s aggressive trade stance, tariff rates on products entering the United States have risen sharply in 2025. The move has already started making goods imported into the U.S. more expensive. China, meanwhile, has imposed its own steep tariffs on the U.S., making it more expensive for American businesses to ship their products to China. Remember, these are the two biggest economies in the world, who, despite many political differences, still conduct over $500 BILLION in trade between each other annually.

Tariffs directly increase the direct costs for imported materials and products. If you’re a coffee shop and a 10% tariff hits Colombia, the Colombian coffee beans you use will cost 10% more. The same goes for any imported component in your supply chain, including coffee cups, tables and chairs — the list goes on.

Without adjusting prices, tariffs can eat straight into profit margins. That’s why businesses, especially small businesses with low profit margins, can’t afford to not pass the tariff cost onto consumers. Recently, some businesses have even started implementing tariff surcharges on their receipts.

A practical example: The coffee shop dilemma

To show just how tariffs can affect a real business, let’s build on that hypothetical coffee shop I mentioned earlier.

Say the shop has been doing well lately, with an 8% profit margin. It brings in about $20,000 in annual profits from selling espresso drinks, tea and baked goods.

But now our coffee shop faces tariff increases on two essential supplies. First, there’s a new 10% tariff on coffee beans from Colombia. That $10 pound of beans now costs $11. Then there’s a whopping 50% tariff on paper cups imported from China.

Some might say to just buy American. But often that’s not possible. Growing coffee beans requires specific growing conditions that simply don’t exist in the United States, for instance. So the coffee shop has no choice but to import those beans and pay the tariff.

These tariff increases hit the coffee shop’s Cost of Goods Sold (COGS) immediately. Before tariffs, all the direct costs for espresso drinks, beans, cups, milk, etc. accounted for 30% of the sales price. When the impact of both tariffs is taken into account, that percentage jumps to 40%.

The consequences? If the coffee shop doesn’t raise prices, its profits will fall from $20,000 to just $12,000, and its profit margins will shrink from 8% to 5%. That’s obviously a really significant hit, one that many small businesses can’t afford to absorb year after year.

The anti-panic plan: Financial modeling for tariff pricing

So how should a business respond to tariff uncertainty? The most effective approach is to build a simple financial model that shows you exactly how tariffs will impact your business.

Here’s how to build a basic tariff impact model. We’ll use our coffee shop example:

1. Build a baseline Forecast

Start by looking at your current profit and loss statement, which should show your revenue, expenses, and profit margins. For the coffee shop, that baseline included $20,000 in annual profits and an 8% profit margin.

2. Create a “tariff scenario”

Duplicate your baseline forecast to create a dedicated “what-if” scenario specifically for analyzing tariff impacts. This scenario will forecast higher direct costs than the baseline forecast due to the more expensive coffee drinks and cups, as step three explains.

3. Adjust Direct Costs

In your tariff scenario, update your cost percentages to reflect the tariff impact. For the coffee shop, this meant increasing the cost of goods for espresso drinks from 30% to 40%.

4. Analyze the Impact

Compare the profit and loss statements from your tariff scenario to your baseline forecast. Quantify the specific impacts on both total profit and profit margin. For the coffee shop, the impact will be reflected in the lower income ($12,000 with tariffs versus $20,000 without tariffs) and profit margin (5% with tariffs versus 8% without tariffs).

Finding your new price point: Modeling price adjustments

Once you’ve calculated the impact of tariffs on your business, the next step is figuring out how to adjust your prices to maintain profitability.

Here’s how to model price adjustments using our coffee shop example:

1. Calculate a reasonable price increase: For our coffee shop, the cost of goods for espresso drinks increased by 10 percentage points (from 30% to 40%). For a drink previously priced at $6.50, this suggests a price increase of about $0.65 (10% of $6.50). As a starting point, we'll test a new price of $7.25.
2. Update revenue in your scenario: In your tariff scenario, change the average price per unit to reflect your calculated price increase. For our coffee shop, we'll change the average espresso drink price from $6.50 to $7.25 while keeping the sales volume the same.
3. Evaluate the results: Review your updated profit and loss statement to see how well your price adjustment recovers your profit margin. In our coffee shop example, the price increase to $7.25 improved annual profit from $12,000 to $17,000 and raised the profit margin from 5% to 7%. That's better, but still below the original 8% margin.
4. Try different price points: If your first price adjustment doesn't get you to your target profit margin, test other price points. For our coffee shop, we tried a second price point of $7.50, which further improved annual profit to nearly $19,000—much closer to the original $20,000 baseline.

The outcome of this modeling process is a pricing adjustment backed by actual numbers rather than guesswork. Instead of reacting emotionally to tariff announcements or making arbitrary pricing decisions, you’ve systematically evaluated the impact and determined exactly what price adjustments you need to make to maintain your business’s financial health.

From uncertainty to action

I hope I’ve shown that, even though tariffs bring uncertainty to your business operations, they don’t have to derail your profitability or growth plans.

By following the steps I’ve outlined, you can transform tariff challenges from anxiety-inducing problems into manageable business decisions. Financial modeling gives you the clarity to see exactly how different pricing strategies affect your bottom line.

The key to navigating tariff uncertainty is to embrace your financials rather than avoiding them. Use these challenges as an opportunity to develop your financial modeling skills. The work will help you navigate the current situation, and put you in a better position to take on unexpected changes in the future.

Sabrina Parsons

Sabrina has served as CEO of Palo Alto Software since 2007. She and her husband, Noah, founded a UK software distribution company in 2001 that was acquired by Palo Alto Software in 2002. Sabrina is a successful Internet expert, having served as Director of Online Marketing at Commtouch, Senior Producer at Epinions, and founder of her own Web consulting company, Lighting Out.