[00:00:01] This is Sales Globe Signals and I'm Mark Danolo.
[00:00:05] Tariffs who will pass through costs and prices and how might that impact quotas in signals? We're looking at two 1 what are the market signals and 2 what does it mean for profitable revenue growth?
[00:00:21] Here's what you need to know.
[00:00:23] Tariff Market signals indicate manufacturing, whole, wholesale and retail have the biggest unit cost increase expectations.
[00:00:31] Companies are bracing before the storm. Manufacturers Actual costs are lower than prior month while retail and wholesale already see increased costs over prior month.
[00:00:42] Companies anticipate passing through 47% to 62% of costs with increased prices as large retail and wholesale lead the pack.
[00:00:52] Quota uncertainty is on the rise if costs increase hold longer term Price elasticity reveals three scenarios and actions you should consider for your quotas.
[00:01:03] What are the market signals?
[00:01:05] One economic driver in the spotlight now is of course tariffs. Uncertainty and speculation abound as organizations guess at what might happen and what the effects might be. Some are taking action and many are holding steady until they get better visibility on the course ahead.
[00:01:21] Lets add a few points to the radar screen to give you some additional insight to inform your course on revenue growth.
[00:01:29] Unit cost expectations are elevated across industries in anticipation of the effects of tariffs.
[00:01:35] Let's look at the Federal Reserve's Six District Business Inflation Expectations Panel, of which SalesGlobe is a contributing member.
[00:01:42] The biggest spikes in cost expectations over the next year are for manufacturing, retail and wholesale. Each group sees a significant increase in unit costs, predicting approximately a 3% rise from between 2% and 2.5% a year ago.
[00:01:58] Transportation and warehousing also see a spike predicting just over a 3% increase, rising from just below 3% a year prior. Although it's not as extreme as their supply chain neighbors manufacturing, retail and wholesale, some of the narrow arrangement expectations between last year and this year may be due to the services nature of transportation and warehousing, drawing more upon labor and less impacted by tariffs than organizations requiring heavier materials inputs.
[00:02:27] For industries that include services, health care, hospitality and leisure. Unit cost increase expectations are nominal over prior year Bracing for impact Are expectations greater than reality?
[00:02:42] By comparison, when we look at actual month increases compared with the year ahead projections, we see a contrast.
[00:02:49] Manufacturing companies, despite their spike in year ahead cost concerns, report actual lower costs than prior month and about even with the prior year.
[00:02:59] Retail and wholesale also show a spike in year ahead unit cost concerns, but do appear to already see increased costs over prior month.
[00:03:08] Like manufacturing, transportation and warehousing anticipate a unit cost increase a year out but report current lower month over month actual costs across the board, concerns about anticipated unit cost increases, largely due to tariffs, may be ahead of the actual cost increases.
[00:03:26] Companies may be preparing for the anticipated tariff storm through shifts in supply chain automation and efficiency and pricing.
[00:03:35] Are we underestimating the impact as we look at these actual and anticipated unit cost changes? For context, it's important to note that over the past decade, the average annual increase in the US producer price index has been approximately 2.5 to 3%. So these actual anticipated cost increases will fall within historical 10 year averages.
[00:03:56] Who Will Pass Through Costs and Prices Speaking of the price index, we hear a lot of talk about how much companies may pass through price increases to their customers.
[00:04:06] The challenge with that talk is that it's too general and it leaves us little to work with. So let's get specific about where it may happen and what the actions are that we can take.
[00:04:16] Price pass through differs by goods producing and services producing firms. Companies that produce goods would have an obvious cost increase from import tariffs because they may manufacture those products in other countries and import them into the US or they may import components from other companies to embed them into their US Manufactured products.
[00:04:34] But for firms that produce services, you may ask how would they be affected by tariffs on imported goods? The answer is that many services firms use imported physical goods or products within their services.
[00:04:46] For example, IT services firms may incorporate technology equipment in their offering, which could impact their overall costs and margins.
[00:04:54] 47% to 62%.
[00:04:57] That's a lot of cost pass through.
[00:04:59] Let's take a look at two scenarios of cost increases due to tariffs. At a 10% cost increase, goods producing firms say they'll pass through on average 62% of that cost increase to customers.
[00:05:11] Service producing firms say they'll pass through an average of about 49% of the increase.
[00:05:16] Under the scenario of a much larger, say 25% cost increase, goods producing firms absorb more of that increase and they say they'll pass through about 55% of the increase.
[00:05:27] In the same scenario of a 25% cost increase, services producing firms say they'll hold the line and still pass through about 47% of that cost increase.
[00:05:38] Keep in mind though, that costs for goods are a smaller portion of total costs for services firms, so they likely would have less of a total margin impact than cost increases for goods producing firms.
[00:05:49] Size and Sector Matter when we look at cost increase scenarios by company size and industry, the responses become more meaningful as cost increases rise. Larger companies say they won't ease off on the pass through but will get more aggressive on price increases than their smaller counterparts. This may be because these larger companies have greater pricing power in their markets.
[00:06:12] Who are these companies who will be so bold on pass through? Going back to our observations on industry anticipation of rising prices, retail and wholesale say they'll pass through the greatest amount of cost increase through price increases. Retail ranging from 56% to 60%.
[00:06:28] Manufacturing is close behind, saying they'll pass through 48% to 54% of cost increases through to their customers.
[00:06:36] Manufacturers also appear to be the driver behind the increased portions of pass through as costs increase.
[00:06:42] What does this mean for profitable revenue growth?
[00:06:45] These unit cost actuals, unit cost expectations and anticipated price pass throughs give us a lot to assimilate.
[00:06:54] Let's simplify it in terms of what it might mean for your organization's profitable revenue growth.
[00:06:59] Customers with current Cost Trends that are Lower than Future Cost Expectations Unit cost expectations over the next year are higher than the current trend for manufacturing and transportation and warehousing.
[00:07:10] Finance, insurance, real estate, business services, healthcare, hospitality and leisure also have elevated expectations one year out compared to the current trends which are stable or declining unit costs for your customers in these groups, you may consider how to prepare them for those potential cost increases assuming current tariff trade forces continue.
[00:07:30] Customers with current cost trends that are increasing in line with future cost expectations, retail and wholesale are already experiencing unit cost increases on trend with their year out projections.
[00:07:41] For your customers in these groups, you may think about how you can mobilize quickly to address the pressures they're already feeling, as well as how you can create a 12 to 24 month plan.
[00:07:52] Customers who plan to pass through significant portions of their cost increases.
[00:07:56] For these companies, they'll present higher prices to their end users.
[00:08:01] Depending on the price elasticity of demand for their products or services, they may experience customer attrition to deferred purchases, substitute products, or defection to competitors with lower prices.
[00:08:12] These companies may have to pass through a large portion of cost increases because they have thin margins and and can absorb those increases. Or these companies may sell in markets where demand is inelastic. For example, as essentials there customers must buy. Think of that broken washing machine or the car that has to be fixed. Using a washboard or walking is not an acceptable option for most people.
[00:08:34] For your customers in these groups, you may explore options for helping them to strengthen their value propositions, increase their efficiency, or lower their cost with your products or services to help offset their price increases.
[00:08:46] Customers who must absorb those cost increases in their margins.
[00:08:49] These companies may maintain their current prices or pass through less cost with a price increase.
[00:08:55] They may do this because the demand for their products is elastic, for example non essentials or luxury items for which their end users will find alternatives or wait on purchases. Think of that nice dinner out or that new set of golf clubs. Dinner at home or sticking out with the old sticks will have to suffice.
[00:09:11] These companies will have to absorb those higher costs in their margins to keep revenues up and to them, lower margin revenue is better than no revenue for your customers in these groups, you may consider approaches to help them better understand the needs of their customer segments, protect their base, and grow their business.
[00:09:27] You may also look at methods to increase their efficiency or lower their costs with your products or services to help protect their margins.
[00:09:35] Your Organization Pass Throughs and Quotas from the perspective of your organization, you may think about how these anticipated cost increases and price pass throughs impact your internal operations and how you can improve your value proposition to your customers like we talked about above and increase your efficiency and improve your productivity. When there are changes in market demand or market opportunity, sales quotas are often a question. Should we raise, lower or leave quotas? The same declining revenue or profit levels in your customer base could decrease their propensity to buy from your organization and put downward pressure on your sales organization's quota attainment. Of course, all customers are not the same and some segments may become better opportunities for your organization.
[00:10:19] You may consider targeting your sales organization toward customer segments less impacted by tariff, cost and price pressures and supporting with sales incentives to move your team in the right direction.
[00:10:30] You may also consider shifting their focus toward offers better aligned to those segments and as we described above, honing their value propositions to your target segments to help them better solve their challenges when it comes to tariff impacts on your business and their effect on quota attainment and potential quota adjustments. Let's look at the puts and takes in your business under three broad scenarios.
[00:10:51] Scenario 1 Elastic customer demand and increasing your prices if your customer demand for your offer is elastic as your prices increase, customers can delay or forgo purchases or find substitutes.
[00:11:06] So as your price increases by a certain percent, customer demand will decrease a greater percent.
[00:11:11] In this situation, if you're passing along cost increases to your customers in the form of price increases that may lower revenue, decrease quota attainment and reduce sales compensation earnings and and increase the risk of sales turnover.
[00:11:25] If this plays out as a longer term scenario, you may evaluate whether you should rethink your quotas to better align with adjusted market opportunity without increasing your compensation cost of sales.
[00:11:36] Scenario 2 Elastic customer demand and maintaining your prices.
[00:11:41] If your customer demand for your offer is elastic, you may decide not to be aggressive in passing along price increases to maintain your sales levels.
[00:11:50] In this situation, taking on a good portion of those increased costs will lower your margins.
[00:11:55] While quota attainment may not be as heavily impacted as in the first scenario, your compensation cost versus profit will increase if you're paying the same incentive levels for the same revenue at a lower margin.
[00:12:06] If this plays out as a longer term scenario, you may consider shifting from revenue to profit or margin as a primary performance measure and setting quotas based on profitable market opportunity.
[00:12:18] Scenario 3 Inelastic customer demand and increasing your prices if your customer demand for your offers is inelastic, meaning there are few substitutes and your customer still has to make the purchase, as your prices increase, customer demand decreases at a lower rate, netting out to a positive for your business.
[00:12:36] So as your price increases by a certain percent, customer demand will decrease by a lesser percentage. In this situation, your revenue may increase although your margins may stay consistent net of tariff pass through.
[00:12:49] This could increase quota attainment and sales compensation earnings. Because a pass through cost like tariffs carry no margin, your sales compensation cost versus profit would increase putting you in a higher cost situation.
[00:13:02] If this plays out in a longer term scenario, you may consider either shifting to a profit or margin as a primary performance measure or resetting revenue quotas based on the inflated revenue expectations and from cost pass throughs to set your direction? Here are some questions you may ask your organization.
[00:13:20] How can you refine your customer segmentation by tariff impact to better identify those that are hurt by lower margins due to higher costs? They cannot pass through those that are passing through a larger portion of their costs with increased prices or other variations?
[00:13:33] Which of those tariff segments do your offers better align with and how can you evolve or shift your offer and value proposition to better align with their needs?
[00:13:41] Which of those customer segments need immediate help to address their challenges and which need a 12 to 24 month plan and how can you address each group?
[00:13:50] How can you better align your sales organization, sales channels and sales process toward those segments with the greatest near term and midterm opportunity based on the price elasticity of demand for your organization's products or services? Which scenario are you in and what tactics should you take with your sales compensation or quotas to drive the organization in the right direction and set attainable goals that align with the sales organization's overall goals and maintain or improve your compensation cost of sales Your call to Action look at each of these signals that we discussed around unit cost expectations and tariff cost price pass throughs.
[00:14:27] Then consider their impact from two perspectives.
[00:14:30] How will they affect your customers and their ability to grow and how will they affect your business?
[00:14:36] Get beyond current state and ask your team where they see the signals projecting ahead and what this means for your organization's profitable revenue growth.
[00:14:44] Consider each of the questions I've asked, add your own, create a plan and get into action.
[00:14:51] Salesglobe Signals is about seeing a bigger macro view on growth and taking actions that will help you reach your growth aspirations. To learn More about how SalesGlobe can help your business, visit
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