Should You Absorb Cost Increases or Pass Them On to Customers?

That leaves you with a tough choice: absorb the increase, pass it to your customers, or find a middle ground. Making the right call starts with understanding how pricing affects your profit—and how your customers may respond.

The Trade-Off: Profit vs. Customer Retention

Price increases of any kind—whether driven by tariffs, inflation, or rising wages—often force small business owners into a balancing act. According to the New York Federal Reserve:

• 75% of businesses passed some or all tariff-related costs to customers.
• 25% chose to absorb costs—at the expense of their margins.

Here’s the challenge:

• Passing costs helps you stay profitable, but could frustrate or even lose customers.
• Absorbing costs protects customer relationships, but squeezes your cash flow.
• Hybrid approaches can work, but only if you understand where you have flexibility.

Options for SMBs Facing Rising Costs

When dealing with inflation, tariffs, higher labor expenses, or any type of other cost increases, consider these approaches:

a. Absorb the cost (short-term fix)

• Useful when increases are minor or temporary.
• Good for businesses with high margins or strong cash reserves.
• Risk: Long-term absorption may erode profitability.

b. Pass it on (transparent price increases)

• Helps protect your bottom line.
• Requires careful customer communication.
• Works best if your product or service offers clear, unique value.

c. Hybrid approach (strategic pricing)

• Raise prices slightly, but also adjust packaging, offerings, or delivery.
• Offer discounts or loyalty rewards to ease the impact.
• Can help maintain trust while covering new costs.

Questions You Should Be Asking About Cost Increases

Every business is different, so the right move depends on your numbers and your customers. Start by asking:

• How much of a price increase can my customers realistically tolerate?
• If we absorb the cost, how does it affect our profit margin this quarter?
• Are there other expenses we could cut or optimize instead of raising prices?
• Can we offer “value adds” to justify higher pricing (e.g. improved service, bundles)?
• What do our competitors charge—are they raising prices too?

What You Can Do Next

Take action by analyzing your position and talking to the people who matter most—your suppliers and your customers.

• Review your margins: Use current numbers to test different price points.
• Communicate clearly: If you raise prices, explain why—especially if it’s tied to global issues outside your control.
• Ask your suppliers: Can they offer a discount, delay increases, or suggest alternatives?

Economic pressures like tariffs, inflation, and minimum wage increases are often outside your control—but your pricing strategy isn’t. With the right questions and a flexible approach, you can protect your business without losing the customers who keep you going.

If you’re unsure what makes sense for your business, try asking Rocket Copilot or connect with a Legal Pro.