Input Costs Affecting Product Pricing

Back to Tariffs

The tariff cuts on baby clothes and select sporting goods had a lowering effect on consumer prices. This is evidenced in the “Why Reduce Tariffs” section of this site. The extent to which each product was reduced, however, depends on a number of factors and it is worthwhile exploring these complexities when trying to understand the effect of a single input factor on the final retail price.

It is also important to note that sourcing and buying practices vary considerably from one retailer to another, depending on the size and scope of the store.

Let’s begin with examples of input factors that will impact the price of a good:

  1. Materials/components
  2. Packing
  3. Labour
  4. Manufacturing process - variable
  5. Manufacturing process - fixed allocation
  6. R + D, product development costs
  7. Selling, General and Administratice expense
  8. Freight
  9. Duty (if applicable)
  10. Margin
  11. Marketing
  12. Brand allocation
  13. Moulds and tooling amortization
  14. Warranty
  15. Exchange rate (if appropriate)

Business Processes Affecting Product Pricing

  • Pricing Strategies. There are a range of pricing strategies used in the retail industry. In some cases retailers employ a centralized national pricing strategy and as a result there is little or no variation in product prices between stores. In other cases retailers will establish a “recommended selling price” but each store has the discretion to set the selling price based on competitive factors, such as proximity to a U.S. border.

  • Procurement/Purchasing Strategies. A variety of different product purchasing strategies, which are referred to as procurement practices, are used by the Canadian retailers. These range from central procurement models (where all relationships with wholesalers/suppliers are managed through a centralized team and then product is distributed to individual stores), to the development of centralized price agreements (where individual stores order directly from the distributor or wholesalers, at a centrally agreed upon price). These differing models will impact both the type of product that is offered in individual stores, as well as pricing strategies.

  • Exclusive Distributor Agreements. In some cases distributors or suppliers have an exclusive right to distribute particular products to Canadian retailers. Retailers have said that in some cases, where exclusive agreements are in place, lower costs due to tariff elimination can be reflected in distributor prices to retailers and then passed along to consumers. However in other cases, distributors do not lower their prices and, because of the exclusivity rights, retailers can’t lower product prices if they want to carry these specific products.
  • Seasonal vs Non Seasonal Products. Unique pricing strategies are often in place for seasonal products such as hockey skates, baseball equipment or snowsuits. These prices are set for a particular season and will only vary if the product goes on sale near the end of that selling period. Conversely, products that are offered on a year-round basis will often have a consistent selling price that is determined at the time the product is made available for sale.
  • Provincial Government Regulations. Specific government regulations, unique to particular provinces (e.g. recycling fees), will result in small variations in product prices.
  • Inventory Management. Inventory strategies will also affect the timing of price reductions at the store level. In some cases very little inventory is available where in other situations six to eighteen months’ worth of inventory could be on hand. Generally, reductions in tariffs are incorporated into prices once inventory from the pre-tariff elimination time period had been sold. Naturally this will vary from one retailer to another based on size, buying capacity, and warehouse facilities.
  • Product Sourcing. Different countries are subject to different tariff rates. For example, some countries trade with Canada under the General Preferential Tariff (GPT) agreement which offers lower tariff rates from developing countries. Others trade under the Most Favoured Nation Agreement, which offer rates that are generally higher than GPT. So the originating country will have an impact on the final price of sale.

Isolating the effect of any one factor can be challenging.

The exchange rate, as an example, is a factor that varied significantly from the time that tariff elimination on sporting equipment and baby clothes was introduced in March 2013. To illustrate:

  • Between March 2013 and October 2014, the value of the Canadian dollar decreased from near par (.9759) to .8919 cents (using the monthly average exchange rates published by the Bank of Canada), a decrease of 9% over this period.
  • As such, similar products purchased at different times during this period would have different costs.
  • In this scenario, the decrease in the exchange rate would have decreased the retailers’ buying power, thereby increasing the cost to purchase an item which would have resulted in a higher retail price.

Currency is just one example of a factor that would have driven prices up while tariff elimination simultaneously lowered costs.

It is important to note: Without the tariff elimination, retail prices would have been much higher.

The above illustrates the multiple factors that retailers must consider when determining product pricing.