How to Navigate Tariff Uncertainty with AI Pricing Optimization

News about tariffs exploded in 2025, and with it came a high level of uncertainty for retailers. Tariffs are on one day and off the next. Prices could rise, but by how much? When will increases begin? Which products will be affected?

Although uncertainty is unwelcome, it could be a time of opportunity for retailers that use their pricing optimization tools to respond to volatile market conditions no matter in which direction they move.

Fortunately, we can draw parallels to the recent period of inflation that followed Covid and use many of the same pricing techniques and proven best practices to account for tariffs and the rising cost of goods.

Balancing Strategic Priorities

When the costs of goods rise, retailers have to respond. Some may go old school and simply pass on increases to the consumer to maintain margins. This is a blunt-edge approach, and we know there's a better way to respond, one that balances price perception, elasticities, market segmentation, and, of course, profit and margins.

Price optimization software is uniquely qualified to enable retailers to respond optimally because it considers all rules and guardrails that were set up to achieve a retailer's strategic priorities. For example, it can come up with a solution that balances price perception on items that are most important to shoppers, such as key value items (KVIs), while finding margin and profit elsewhere.

It can also go much further. Depending on how you structure your pricing strategies, you can come up with pricing recommendations that differ by store, region, channel, and customer segment.

For example, let's say there is a 10% cost increase on a product, and after running it through your AI pricing platform you decide to take prices up 12% in some markets and up 6% in others, while in other markets you make no price increase. This diversified approach could produce wins for price image, customer sentiment, and overall margin.

And that's just for one item. This same approach can be applied to a mix of items that may be facing cost increases.

Options and Opportunities

One of the first steps retailers should take when preparing for tariffs is to make sure data is structured in a way that allows for quick identification of products by country of origin. This will help you analyze your exposure to risk. One good approach is to create data categories that indicate high and low tariff risk, and then create strategies for multiple contingencies, such as conservative, aggressive, and middle-of-the-road pricing responses.

Here are other ways to use your data-powered AI pricing platform to determine options and create new opportunities:

• Negotiate with Suppliers. If and when your suppliers pass on cost increases because of the tariff, you can use AI to model how higher price points may affect sales. Armed with this visibility, you can determine whether you can drive more sales if you negotiate a smaller increase to pass on to the consumer. This way, you can search for optimal cost increases from suppliers that are wins for you, the supplier, and your customers.
• Expand Private Label. Now could be a good time to consider creating new private label opportunities, especially if a national brand has to raise costs by 20% or 25%. If a national brand product has a similar private label product made in the U.S., then you can leverage the pricing gap between brand A and private label B to develop a compelling private label strategy. Even if the price gap is lower, say 5% to 10%, moving customers to private labels gives you more control over margins when national brands come to you with cost increases.
• Rethink Everyday Promotions. Data has shown that a lot of promotions are profit drains and often only worthwhile because of vendor funds. Promotions incur operational costs, so just by eliminating ineffective promos you can free up funds to invest in your everyday price position. However, you don't want to stop doing promotions. Instead, focus on highly elastic products that consumers love, so you still get massive lift to drive traffic to stores.
• Slow Roll Markdowns. Some tariff increases could affect products with a long shelf life. Since you will have purchased the product some time ago, instead of doing the usual markdown approach, do nothing. The product is already a good deal compared with the price that will be coming, so you are still offering value to the consumer and preserving profit.
• Leverage Competitive Analytics. No matter the economic climate, competitors can always lower prices to meet yours. It is smart to focus on items that are most important to them — their KVIs — and then track how frequently they change prices. If they change prices on Mondays, you can take down a KVI price on Tuesday and have a price advantage for six days. You can also optimize competitive pricing on KVIs to target such strategic goals as growing volume, gaining market share, enhancing price perception, and more.
• Use Conversational Analytics. As GenAI becomes heavily integrated into pricing solutions, it is now possible to ask questions of your data, like: Which items come from China? Which competitors have followed me the most on price in the past six months on this item? You can 'talk to your data' and get answers that can save hours of time that would have gone into trying to filter reports.

One final tip: In addition to focusing on margins and price image, you should put thought into creating a communication plan to accompany your tariff strategy. Inflation fatigue is real among consumers, who cast a wide net of blame for egg-flation, shrink-flation, meat-flation, and all the "flations" we've seen.

Customers are looking for value. So, if you have to raise prices because of tariffs, let them know why. The messaging doesn't have to be political, but it is important to get control of the narrative so they understand you are also taking a hit.

This may be a time of uncertainty, but as we saw with inflation, whenever prices dramatically change, retailers can use pricing optimization tools to find the right balance that delivers win-wins for their customers and business.