This year, there has been a lot of talk about tariffs. Many people are discussing the topic, yet they are not very familiar with what tariffs actually are or what impact they have.
Trade headlines are noisy: tariffs, counter‑tariffs, and retaliatory tariffs. But what matters to eCommerce founders and finance teams is simple: higher landed costs can crush gross margin overnight.
So let’s break down this major topic that has captured a lot of attention so far in 2025.
What is a tariff?
At its core, a tariff is a tax charged on businesses that import products from another country. That’s right - it is a tax that a local business pays to its own government when bringing in goods from abroad. The main purpose is to encourage local production by making imported goods more expensive and to increase government revenue.
How does this affect you?
Tariff Impact Funnel
Tariff ↑ → Landed Cost ↑ → Price ↑ or Margin ↓ → Demand Shifts → Cash Tightens
Tariffs can lead to both expected and unexpected outcomes, depending on how they are managed. In most cases, a few key things happen:
Prices go up:
When a business faces extra costs because of tariffs, it usually responds by increasing the price of its products. Even if a business doesn’t directly import goods, it may be affected through vendors or suppliers that do.
These suppliers will likely raise prices on raw materials, components, or transport, which increases the business's daily operating costs.
Eventually, even businesses that are not directly affected by tariffs may raise prices simply because their competitors have. This gives them an excuse to adjust pricing while maintaining their profit margins.
Ultimately, businesses need to stay profitable, and passing on added costs to consumers is one way to do that. Once prices go up, they rarely come back down.
People spend less:
As prices rise and economic uncertainty grows, consumers begin to cut back on spending to prepare for potential hardship.
We've already seen a volatile stock market where many people lost significant value in their investments and retirement funds.
Reduced spending slows down the flow of money in the economy, and that opens the door to both inflation and recession occurring at the same time.
People look for substitutes:
Even with tighter budgets, people still need to buy essential items. (Remember the great toilet paper shortage of 2019?) Some items will still be purchased, even reluctantly, but most consumers will seek more affordable options. This means they will start questioning their purchases more carefully, asking:
- How much quality am I willing to give up to save money?
- Do I have enough trust or positive experience with this product or service to keep using it?
- Can I do without this for now?
What business owners should watch closely
During times like these, it becomes especially important for business owners to keep a close eye on certain areas in order to make smart decisions:
Revenue trends:
If your business sells products - whether through e-commerce, retail, or services - track your revenue trends closely. Compare your revenue to the same period last year to help estimate your performance over the next 6 to 12 months.
Analyze customer behavior as well. Are customers shifting from high-margin imported goods to lower-margin domestic alternatives? Are they buying in bulk instead of smaller quantities? Are they choosing basic service packages over full-service ones? Are you seeing growth or decline in specific regions or industries?
Understanding your buyers will help you plan your marketing and spending more effectively.
Cost of goods sold:
This is likely where the impact of tariffs will be felt most clearly. Review trends in product costs, shipping fees, and SKU performance to identify which items remain profitable. It’s easy for smaller cost changes to quietly reduce your margins, so regular monitoring is critical.
Inventory management:
As customer behavior shifts, it will affect how quickly you move products. Holding on to unsold inventory comes with carrying costs, and it can limit your ability to purchase and ship higher-demand items. A good handle on inventory turnover is essential.
Cost management:
With tighter margins and more cautious customers, your business must also operate more efficiently. That means evaluating staffing costs, cutting unnecessary software or service subscriptions, reviewing advertising spend, and holding off on large purchases.
It also means making sure your team is working effectively and looking for ways to save time through automation or by eliminating outdated tasks.
Foreign exchange:
Countries impacted by tariffs - for example, when the US imposes tariffs on Canada - may see their currency lose value due to reduced demand, less investment, and rising inflation. If your business relies on imports or operates internationally, shifts in foreign exchange rates can significantly affect your costs. Finding a reliable FX vendor and monitoring currency trends can help reduce risk.
Cash flow forecast:
Cash becomes even more critical during uncertain times. When you make informed predictions about your revenue, your spending decisions can follow accordingly. It is important to forecast your cash flow to avoid surprises.
Comparing your budget to actuals each month, knowing where you went over budget, and understanding how much runway you have left before cash gets tight are all key parts of staying financially healthy.
Preventative actions businesses can take:
Once you’ve identified the key risk areas, there are several steps you can take to prepare your business. Here are some suggestions:
Use an effective inventory management system (IMS):
Since tariffs can directly affect your cost of goods sold, it is crucial to understand the finer details that influence your margins. A reliable IMS gives you better visibility and helps you act before small issues become major problems.
Work with knowledgeable professionals:
If you already have a strong internal team or external support - accountants, bookkeepers, or advisors - that’s great. If not, now is the time to bring in the right help. Experienced professionals who understand your business and can set up the right tools will be invaluable. Ask yourself: Can they identify and monitor KPIs? Can they build the infrastructure you need to stay profitable?
Find the right FX vendors:
Many foreign exchange vendors offer tools that go beyond simple currency conversion. They may provide options to lock in exchange rates in advance and offer insights on the economic outlook. Ask around, talk to your advisors, or connect with other business owners to find trusted providers.
Build strong vendor relationships:
Your business is part of a larger network. If your suppliers are affected, chances are you will be too. This is why having solid relationships with your vendors matters. Strong partnerships can give you better negotiating power and support when challenges arise. Pay attention to who has been dependable, because you will need trustworthy partners during times of stress.
Final Thoughts
Tariffs may seem like a macroeconomic issue, but their effects reach down to the day-to-day operations of individual businesses. While we cannot control the broader economy, we can control how we prepare and respond. By staying alert, managing what we can, and strengthening the foundations of our business, we give ourselves the best chance to weather the storm and come out stronger.
