How to Tailor Your Tariff Response: The 4-Part System

[00:00:00] Taylor Holiday: Welcome back to another episode of the Ecommerce Playbook Podcast solo edition.

[00:00:05] I'm back by myself and today I want to bring you the first half. Of a webinar that we did for all of our clients on Friday. We had about a hundred people in attendance going through a tariff response strategy. We also brought in a number of industry partners to put together some exclusive offers for CTC clients.

[00:00:23] And I wanna share you a little bit about the setup that I gave, that sort of outlines how we are thinking about discussing with our clients how they should consider responding. Two, the current ambiguity of the market. Now, when I thought about this, I took time to try to really design a cohesive message.

[00:00:40] What I recognized was that there is no single response to these kinds of problems. It really is distinct and specific to the state of your individual business. And I tried to break that into a set of categories that I think different brands could be find themselves in and how they should respond in light of that.

[00:00:57] So if you're following with us on YouTube. Awesome. Thank you for doing so. Please make sure to like and subscribe on YouTube. I'm gonna have the deck up from the webinar that I'm gonna talk through.

[00:01:08] I'm gonna do my best to communicate, knowing I'm on a podcast as well, here to go through the setup that we gave in our tariff strategy webinar this first week. The first thing, and I'll breeze through this very quickly, 'cause I don't need to reset this on this pod, although it is shifting all the time.

[00:01:23] The current state of tariffs is simply that there is a 10% universal tariff on all imports across the globe, and there is a current updated rate of 125% tariff expressly out of imports from China. And that the de minimis exemption that many e-commerce brands are taking advantage of which allowed for packages valued under $800 from China and Hong Kong to be immune from any tariffs is now gone as of May 2nd.

[00:01:51] And that is currently where we sit. And so the, the reality of that is that if you are dealing with 125% tariff, that is business non-viable, that there are no short-term opex or price increases or solutions that you can do to solve 125%, and you are likely scrambling to reconstruct your supply chain, which is really the only solution to that sort of problem.

[00:02:11] It's a sourcing, manufacturing and production problem, depending on what you believe about the future of that tariff rate. So I just wanna acknowledge that. Upfront. But for the rest of these imports, there are a lot of solutions that provide opportunity. For us to work through them. And I jokingly on the screen, we'll see here that there was a meme going around about this sort of classic.

[00:02:32] If you're a marketer in creative production, you'll appreciate this. This meme here of an Excel file labeled Tariffs Underscore Calc. New Underscore Updated. Final, final, final Xlsx. Sort of just a joke that this is all subject to change at any moment. The other element that I think is really important for us to overlay in this conversation is the present state of consumer confidence.

[00:02:54] So two graphs here. One is the spread, the percent spread between respondents, um, belief that the economy will be better or worse in the future. From the survey that we do on partnership with no commerce called the DTCC. If you go to dtcc.co, you can see that chart. It's a survey that we've been running for over a year now.

[00:03:13] That attempts to create a consumer confidence index for our industry that gives you a view of what we believe consumers consumer or e-commerce customer, consumer sentiment is. And one of the questions that we ask in this survey is about people's belief in whether or not the economy will be better or worse in the future.

[00:03:27] And you'll see that that has been on a downward plummet since the beginning of January. This is really important is that there are sort of multiple dynamics at play at all times in this market. The first is that we are dealing with declining consumer confidence. Even before tariffs even existed, going back to January following the election, we saw this sort of euphoric state in hope and optimism that very quickly has been coming down since the actual start of the year, and that has manifested into declining media efficiency.

[00:03:56] So you can see on the graph of the right some. Data across our portfolio revenue spend, cac, um, a OV median, MER and a MER. And what you see is that CAC is on the rise. We're seeing new customer acquisition efficiency decline alongside that declining consumer sentiment. So before tariffs even showed up, brands were facing the reality that their acquisition efficiency and the CAC portion of their p and l was subject to pressure.

[00:04:23] Now you layer in the COGS pressure and you've got a sort of real conundrum in many cases. And I'd like to describe this moment as sort of the ultimate bridges exercise. So if you followed me for a while, you may have watched my series Bridges 12 part series on. Building a gap or bridge between marketing and finance to better unify those ports of your organization.

[00:04:41] And what I believe about this moment, this issue related to tariffs and struggling efficiency, is that this really is a collaborative effort between these sides of the organization. And that's because there has to be dialogue between our teams to determine the right path forward between your agency, your service providers, or simply between your internal marketing and finance teams.

[00:04:59] Because simply adjusting your ROAS target up is not the solution. You cannot overcome a tariff burden, whether it's 10% or 125%, by simply saying, we will take a more efficient cac. CAC is already under pressure. If we could have solved that suit solution that way, we would've done so already. It is highly unlikely that you as a business are going to be simply say, take the tariff expectation, lower my CAC correspondingly, and maintain the same volume.

[00:05:26] It will likely come at a disproportionate sacrifice to your actual volume. And so what really must happen is that your strategy going forward must actually reflect your balance sheet. This is an exercise that has to begin with a strategic understanding of where you as a business stand from your balance sheet.

[00:05:45] So what do I mean by that? 

[00:05:46] I wanna talk about four variables that I think really do alter the dynamics of how you respond in this moment. The first is how much inventory you have on hand. Okay? This is really important, is that the amount of inventory that you have that is non-subjective tariff, think of it as already paid for in your warehouse.

[00:06:05] Brands that I interact with have wildly varying amounts of inventory that can sort of allow for future revenue growth. Future margin expectation. So if you are running out of inventory today and you have a big shipment of inventory coming in on the water right now, that was a plan for replenishment that was supposed to handle April, late April and May revenue, that that is going to be an immediate margin hit that is really challenging to deal with.

[00:06:30] Whereas let's say you just received a very large inventory shipment and you're actually good all the way through August, well then your response might be very different. Because you actually have a lot of time on a good priced inventory to be able to wait and see what occurs and decide from there. So the percentage of skews and units that have landed pre tariff determines the margin protection and pricing flexibility that you as a business have.

[00:06:53] The second one is obvious. It's your cash reserves. How much runway do you have at your current burn rate? Do you have the ability to absorb short-term margin hits? How aggressive can you be? Could you pay the tariff rate? Do you, can you can you continue to maintain operations if you were to experience a decline in demand?

[00:07:09] So understanding. That debt load is sort of connected, right? What is your repairment schedule? What's the interest burden? This determines the capital flexibility for reorders and what you're able to leverage. And then inventory, turnover, speed to monetize the inventory. It influences obviously your cash conversion cycle.

[00:07:24] So all of these elements and where you as a business sit in relation to each of them actually affects the marketing strategy that I would deploy on your behalf. So strategically, what are the implications of how I would consider each of those variables and how it would show up in our as a partner's growth strategy for you?

[00:07:40] Well, pre tariff inventory is a strategic weapon, right? We can use it to buy time if we needed to. So we could actually slow down the growth or the, the acquisition lever. We could make sure we're taking a higher, marginal expectation and ensure that we elongate the duration of that inventory so that you could either find a new supplier or you could wait and see what's happening on the tariff side.

[00:08:05] Or alternatively, we could use that as a weapon to go and attack and take market share. If you actually have the ability to maintain your pricing leverage on the market, and you have to see all your competitors go out and pass on a large amount of ancillary costs, you could actually go out and win a bunch of market by using that leverage.

[00:08:25] Second, cash is a mote. It creates options when others are trapped by cost inflation. Again, if you have the ability to absorb some of that margin, hit to your cash for the sake of market taking, there could be an opportunity to do so. Three. Debt is gravity. The more you owe, the , less flexible.

[00:08:41] Your strategy becomes, ultimately, your debt obligation is sort of the minimum viable growth responsibility that you have. You have to finance that, or your business becomes at risk. And then inventory velocity is the gear. If you can't turn inventory quickly, even good margin may not save you. So let's imagine four different balance sheet positions that you could be in and what the strategic posture and tactical response would be in light of that.

[00:09:06] So let's imagine you're a brand that's in a very healthy position. You've got strong inventory, you've got high levels of cash and low levels of debt. In that scenario, what we would recommend would be an offensive strategic posture. It would be a market share play. So the response might be to undercut slower competitors.

[00:09:22] Aggressively deploy pre tariff stock for cash and loyalty, right? So you could actually go into, let's say, let's just imagine you're in a hypothetical category of, I don't know, denim, right? And all of a sudden what you see is that all of your competitors have had to increase their prices, 15%. Well, I might actually start putting together emails and communications and ads highlighting that you have not, that your prices are actually better still in place.

[00:09:45] You're taking care of the customer, and I would be aggressive in going out and doing that. There may actually even be opportunity for you to go the opposite direction to actually offer a discount or opportunity. To go and win as many customers as possible in this more market. If you think about all the places where you're gonna be competing, I think about SERPs as a good example, search engine results page, where literally every click I.

[00:10:08] Or bid for a click On a term like men's or women's denim is just a declaration of the price you're willing to pay to acquire the customer. And in these kinds of moments, what happens is brands either reduce their bid. In other words, they require a higher a more efficient ROAS in order to pay for the click, or they raise the price and therefore decrease their conversion rate on the same bid.

[00:10:33] Well, in that environment, you have a massive opportunity if you're willing to hold or even increase your bid, to take significant share of that digital real estate. Now that may come at some cost to you, but if you're in this strong position, you may be able to avoid it. Now, alternatively, let's imagine a second ballot sheet position where you have high levels of inventory, but low levels of cash and high levels of debt.

[00:10:58] This we would take a strategic posture of maybe being more opportunistic, but cautious. In this case, we wanna maximize the marginal value of every unit that we have. We wanna slow burn. Push bundles and stretch cash. So imagine in this case, we may actually would require that we take a more efficient customer acquisition cost, higher roas on our media.

[00:11:18] We eliminate some of the testing budget or other things that might be alternative ab channels that we're beginning to play in. And we would really focus in on, Hey, for this inventory that we have, we've got a lot of it, but we don't have a lot of cash. So in order to go out and either reconstruct our supply chain or pay the tariff in the future.

[00:11:35] We need to improve our cash position, and we don't wanna be trading inventory for customers. We wanna be trading inventory for cash, and so we wanna be more effective. We're willing to take a little bit slower top line growth to be more efficient in our customer acquisition. In a third situation, and these begin to become the more challenging ones.

[00:11:53] Let's say you have low levels of inventory, high levels of cash, low levels of debt. Now this may sound okay if things were on a normal course of purchasing, but in this moment there's actually a challenge. You're a strategic buyer. You need to rebuild wisely. Now, I've seen some opportunities where this is, you could actually explore buying some distressed inventory.

[00:12:12] There might be an opportunity to go to some of your competitors or manufacturers in the space where they're canceling pos or, or trying to get out of them and go in and buy some of that inventory at, at a deep decreased price. 'cause what you're looking for if you have a lot of cash and low levels of inventory, is a way to offset the cost of having to obligate yourself to the tariff.

[00:12:30] You need to resource selectively some of your manufacturing and you need to use pricing power conservatively. Right? So we want to, because we have low levels of inventory, we can't be giving it away. Um. Quickly. So this is usually a situation where you're going to be looking to use, deploy that cash to quickly reconstruct supply chain or find access to inventory that may be distressed.

[00:12:52] And then the last situation, which is one that we have to acknowledge that many brands are in. If you have low levels of inventory, low levels of cash and high debt, you need to move to survival mode. You need to raise prices, cut c liquidate slowly, delay reorders, and focus on it. Focus on your existing customers over new customer growth.

[00:13:09] And there's a lot of brands that find themselves in that situation. You're gonna have to get lean on the opex side. And so the reality is what we're trying to communicate to our clients and force our growth strategists to sit and have a conversation is where are you? Which of these four quadrants do you find yourself in?

[00:13:23] Is it time to be on the offensive? Do you have strong cash, strong inventory, low debt? Is it about margin maximization where you have lots of inventory on hand, but you have low levels of cash and you need to turn that inventory back into cash, not just customers. Do you need to be a strategic buyer? Do you have the cash on your balance sheet?

[00:13:40] Maybe you have access to a good debt facility, but you're low on inventory, and so the next purchase of inventory might be subject to big time tariffs 'cause it's coming outta China. Well now we need to begin to look to alternative supply chains, reconstruct that and thinking about finding ways that we could even find some distressed inventory to purchase.

[00:13:55] Or alternatively, do you have low levels of cash and low levels of inventory, and it's time to batten down that hatches and survive this moment until we get clarity. Each of these. Turn into a different strategy in your meta add account. And as always, the theme that we are constantly emphasizing with our clients is that if you want us to be your growth partner, we have to understand the underlying financial realities in order to be as helpful to you as possible.

[00:14:21] So with that, what are the steps from here? One, decide which of these quadrants do you fall into? Who are you and what is the state of your business? Step two, in light of that, how do your budgets and targets change? And then finally, ensure that your cost data is as accurate and reflects the most real-time information as possible with your partner, whether that's an internal team or an agency.

[00:14:40] When will the inventory begin to reflect the tariffs? How much time do you have? How are we going to approach that problem as it arises? This is a consideration that we wanted to set the groundwork for, for this webinar is to say, all of you are unique. Many of you are subject to the same problem with China, but your solutions are all gonna be different relative to the state that you're in.

[00:15:00] And I would not immediately assume that the, the, that the solution to this problem for every business is to slow down. For some brands, the work that you have done to get here actually puts you in a position to put pressure on the competition and to go and win customers, to build loyalty, to build relationship with a greater share of the market because of the way that you've prepared ahead of this time.

[00:15:21] So consider where you're at and make the decision accordingly. And then the second half of this webinar, which we're not gonna get to today 'cause it was exclusive for CTC customers, is find yourself partners. Like C, D, C, like others in the market. I know on this webinar we had intelligence, postscript dash fi, others that are stepping up and saying, we are going to support you in this moment.

[00:15:42] Find vendors that will do the same. Find manufacturers that will do the same because they are out there, the people that are leaning in and helping you get through this confusing, ambiguous, highly volatile moment, but. As is the case in almost every situation, the response is not the same. The response should be novel relative to the sake of your business and the consideration for your present balance sheet.

[00:16:04] Thanks for stopping by.