Five Key Considerations for Setting Your 2025 Passthrough Strategy

2025 is shaping up to be a year of significant potential disruption. Reflecting on the trends of the past five years and recent events, it’s clear that businesses could encounter formidable challenges. Among the forces driving this disruption are impending tariffs, currency fluctuations, supply chain instability, and protectionist measures, among others highlighted below.

Based on these factors and the responses we’re seeing from the business community, we anticipate another surge in inflation in 2025, driven largely by the impact of the new tariffs. To help organizations navigate this evolving landscape, we recently hosted a webinar on this critical topic. 

During our recent webinar, we emphasized the importance of companies establishing a clear pass-through strategy for managing cost increases. This strategy must first be communicated internally to secure alignment, approval, and buy-in from key stakeholders. Once internal consensus is achieved, the same message should be conveyed to distributors and strategic customers. Some companies have already taken proactive steps, openly explaining to their customer base that 100% of the additional costs due to tariffs will be passed on.

Over the past few years, the cumulative effects of COVID-19, supply chain disruptions, and inflation have compelled many companies to implement significant price increases to keep pace with rising costs. Interestingly, consumers and customers have grown more aware of inflationary pressures and are often more understanding of price adjustments when the causes are clearly explained. However, even with this increased acceptance, companies must carefully evaluate their approach to cost pass-through strategies as we head into 2025, especially in the context of the upcoming tariffs.

Key decisions include whether to:

• Pass 100% of the cost increase directly to customers.
• Pass only a fraction of the cost increase, based on individual customer situations.
• Develop multiple pass-through strategies tailored to specific product lines or customer segments.
• Absorb some or all the cost increases internally.
• Wait and see if disruption materializes.

Each of these approaches requires careful consideration of market dynamics, customer relationships, competitive positioning, and long-term business goals. As businesses prepare for potential disruptions in 2025, defining and executing a well-thought-out pass-through strategy will be essential to navigate the challenges ahead. Here are five considerations to keep in mind:

Your Overall Exposure to Cost Increases

Understanding the extent of your exposure to rising costs is the foundation of an effective pass-through strategy. Companies must analyze the sources of cost increases, such as tariffs, supply chain disruptions, or currency fluctuations, and quantify their financial impact. This involves not only assessing direct costs but also considering indirect impacts, such as increased supplier charges or operational inefficiencies. Businesses with high exposure may need to prioritize aggressive pass-through strategies to protect margins, while those with minimal exposure might opt for more nuanced approaches to maintain customer goodwill. A clear understanding of cost exposure also enables organizations to communicate transparently with stakeholders and customers about the necessity of price adjustments.

The Diversity of Your Product Portfolio

The complexity and variety within your product portfolio significantly influence your pass-through strategy. Different products may have varying levels of cost sensitivity based on raw materials, production processes, or supply chain dependencies. For example, high-margin products might offer more flexibility to defend prices and maintain margins, while low-margin items could necessitate immediate price increases. Additionally, products with strong brand equity or unique value propositions may face less resistance to price adjustments compared to commoditized goods. Companies should adopt a segmented approach, tailoring strategies to product categories and ensuring that pricing adjustments align with both financial objectives and customer perceptions of value.

The Market and Competitive Dynamics You Are Facing

Market conditions and competitive landscapes play a critical role in shaping pass-through decisions. In highly competitive markets, aggressive price increases could result in lost market share if competitors choose to absorb costs or delay price adjustments. Conversely, in markets where cost increases are industry-wide and well-understood, there may be greater customer acceptance of price changes. It is also essential to evaluate customer price sensitivity, potential demand elasticity, but also the history of price behaviors from competitors. Businesses must monitor competitor actions and market trends closely, using this intelligence to strike a balance between maintaining profitability and sustaining competitive positioning.

The Number of Customers Under Existing Contract

Existing contracts can significantly constrain pricing flexibility, particularly if they lack provisions for cost pass-throughs or renegotiation clauses. Companies must evaluate the proportion of their customer base operating under fixed-price contracts and assess the potential financial impact of these agreements. For contracts nearing renewal, it is an opportunity to incorporate dynamic pricing mechanisms or renegotiation terms to better manage future volatility. For long-term contracts, companies may need to explore collaborative solutions with customers, such as mid-term price adjustments or shared cost-absorption strategies, to mitigate financial strain without damaging relationships.

The Strength of Your Customer Relationships

Strong customer relationships can make or break the success of a pass-through strategy. Customers who perceive your company as a trusted partner are more likely to accept price adjustments if they understand the rationale behind them. Open and transparent communication is vital, not only to justify cost increases but also to demonstrate your commitment to maintaining value and service quality. Businesses should approach price discussions as part of a broader conversation about partnership and long-term collaboration. By emphasizing shared goals and providing evidence of cost drivers, companies can strengthen customer trust and minimize friction during pricing negotiations.

Each of these considerations requires a thoughtful, data-driven approach. By addressing these factors, businesses can craft pass-through strategies that protect 2025 profitability while preserving customer relationships and competitive advantages. Disruption in 2025 is just around the corner and might continue for a significant number of quarters. The reality is that your pass-through will be revisited and adapted several times in 2025 into 2026. It is the name of the game. Change is the only constant! 

Ready to future-proof your strategy? Contact us today to learn how Zilliant can help you thrive amidst disruption.