To Raise Prices or Not to Raise Prices: Tariff Tips for Small Businesses

Small and midsize businesses are grappling with the critical decision of whether to absorb or pass on increased costs due to tariffs, with a May 2025 survey indicating 61% of midsize and 59% of small businesses anticipate negative impacts, and a majority expecting higher operating costs. Companies are responding by stockpiling inventory, diversifying supply chains, and, in some instances, deferring capital investments and hiring, while others are innovating. This widespread uncertainty and rising cost pressure are also impacting consumer confidence, particularly in discretionary retail, signaling that these business-level decisions will significantly influence market pricing, product availability, and broader economic sentiment.

Analysis

Small and midsize businesses (SMBs) are facing significant headwinds from tariffs, with a May 2025 survey indicating 61% of midsize and 59% of small businesses anticipate negative impacts, an increase from two months prior. A substantial majority, 74% of midsize and 72% of small businesses, expect these tariffs to directly increase their operating costs. This widespread concern underscores a challenging environment for a critical segment of the economy.

In response, businesses are implementing various strategies, including stockpiling inventory and diversifying supply chains by seeking new vendors or considering in-house manufacturing. However, these adjustments often come with trade-offs, as evidenced by a New York tableware wholesaler and a Brooklyn terrarium business that absorbed profit margin pressures and postponed expansion or hiring to avoid immediate price increases for customers. This indicates a broader trend of deferred capital expenditures and hiring plans across the SMB sector.

The ripple effects extend beyond individual firms, impacting broader economic indicators. Rising costs and uncertainty are beginning to weigh on consumer confidence, particularly within discretionary retail, suggesting a potential slowdown in customer spending. This dynamic forces SMBs into a critical decision: absorb higher costs to maintain customer loyalty or pass them on, risking customer attrition but preserving margins.

The overall sentiment surrounding this situation is strongly negative, with a high market impact score, reflecting the systemic challenges tariffs pose. The dilemma for SMBs highlights potential inflationary pressures if costs are passed on, or margin compression if absorbed, both of which have significant implications for economic growth and stability.

Key Decisions for Investors

• Investors should closely monitor the performance of sectors heavily reliant on small and midsize businesses, particularly those with complex international supply chains susceptible to tariff impacts.
• Given the reported decline in consumer confidence, especially in discretionary retail, it may be prudent to re-evaluate exposure to companies operating in this segment.
• Assess the supply chain resilience and cost management strategies of portfolio companies, as their ability to mitigate tariff-related cost pressures will be crucial for maintaining profitability and growth.