Should you eat the tariff or pass it through? A margin decision framework

Sort SKUs by margin headroom first, then by price elasticity, then by competitive position. High-headroom, low-elasticity SKUs absorb or pass through with little pain. Low-headroom, high-elasticity SKUs are where the real decision lives, and those deserve testing, not guessing. Revisit the call quarterly, because rates, competitors, and elasticity all move.

The two costs of each choice

Absorbing a tariff costs margin directly: a 10 percent duty on a product with 60 percent gross margin is a rounding error, but on a product with 15 percent margin it can erase profitability entirely. Passing it through costs conversion: every price increase sheds some buyers, and the shed rate depends on the category, the price point, and how visible the increase is.

The mistake is treating this as one decision for the whole catalog. A brand with 400 SKUs has 400 different margin structures and 400 different elasticities. The framework below turns one scary decision into a repeatable sorting exercise.

Step one: margin headroom

For each SKU, compute contribution margin after the new tariff rate. Three buckets emerge. Green SKUs keep healthy margin even after absorbing the full increase; these can absorb without drama. Yellow SKUs stay profitable but thin; these are candidates for partial pass-through, like splitting the increase between price and margin. Red SKUs go unprofitable if you absorb; these must pass through, be repriced structurally, or be retired from the affected market.

Do this math with landed cost, not COGS. Brands that model tariffs on product cost alone consistently underestimate the hit, because freight and duty interact.

Step two: price elasticity

Within the yellow and green buckets, elasticity decides. Low-elasticity products, replenishables, differentiated goods, and items where you are the clear quality leader, tolerate pass-through with minimal volume loss. High-elasticity products, commodities, and categories where shoppers sort by price, punish it.

You do not need a perfect elasticity model. Historical promo data is a decent proxy: SKUs whose volume spikes hard on discount are telling you price matters to their buyers. Pass through cautiously there, and consider absorbing where the data says buyers barely notice.

Step three: competitive position

The last filter is what rivals do. If competitors absorb and you pass through, you hand them a price advantage on comparable goods. If competitors pass through and you absorb, you buy share at the cost of margin. Neither is automatically wrong, but the decision should be conscious. Watch competitor pricing for two weeks after each rate change before finalizing your own move; the first mover often sets the category norm.

Where you are the price leader, you have cover to pass through. Where you compete on price, absorption may be the cost of staying in the game, funded by mix shifts toward higher-margin SKUs.

Make it a quarterly cadence

Tariff rates move, competitors react, and elasticity shifts with the season. The framework is not a one-time exercise. Put it on a quarterly rhythm: refresh the margin math, check competitor pricing, and re-sort the buckets. Brands that revisit the call treat tariffs as a managed cost. Brands that decide once treat them as a crisis every time the news changes.

Start this week with your top 20 SKUs by revenue. The sorting takes an afternoon and usually surfaces two or three products where the current approach is exactly backwards.