#243 3 Questions Every Seller Needs to Answer Before Q2

Hey everybody. So oil went from $70 to $105 in 5 weeks. That's a whole lot. Shipping charges have gone up just about to $4,000 or so per container, and consumers are starting to change their behavior in shopping just a little bit. We're noticing it across the platforms. And what does that mean? It means people are getting squeezed from both sides just a bit. So on one side, cost went up 15 to 20%. On the other side, customers are shopping everything and cutting discretionary spending just a bit. So we got 3 options to talk about, right? We got option 1, we need to raise your price and risk losing customers. You need to shrink your product and hope it And, you know, nobody notices. That's option 2. Option 3, eat the cost and watch your margin evaporate. So most sellers are going to pick option 2 or 3, and most sellers are going to regret it because this isn't a short-term problem, guys. This is a structural shift, and the decisions you make in the next 30 days are going to determine whether you are still in business in 12 months. Sounds kind of crazy, right? Well, let's unpack that in today's episode. Hi, I'm Neil Twa, and this is an episode of the High Voltage Business Builders Podcast Week in Review. So today we're talking about margin compression, what's causing it, what's possibly gonna make it get worse, and let the framework for protecting your margins and what it should look like without destroying your brand. So let's get into it, guys. Why is this happening? Let me explain what's actually happening and why it's different from anything we've seen in the last few years. On February 28th, the US and Israel launched strikes in Iran. Unless you've been under a rock, you weren't paying attention to that. You probably should be. In around 48 hours, Iran effectively closed the Strait of Hormuz. That's the waterway, in case you aren't knowing, where 20% of the world's oil normally passes through. Now, right now it's mostly closed. Major shipping companies have suppressed transits and over 150 ships are stranded. And Iran just announced on March 27th that the Strait of Hormuz is closed to vessels going to and from US and Israel and allied ports. They're also demanding transit fees, $2 million per oil tanker. So here's what that means. With oil from $70 per barrel to $108, for every additional month that the strait stays closed, analysts expect another $10 to $15 per barrel increase. So shipping companies announced surcharges. CMA CGM, $4,000 per container. Hapag-Lloyd, $1,500 per TEU. And the war risk insurance went from 0.25% of vessel to 5 to 10%. That's 20 to 40 times increase. I know Trump stepped in and offered shipping options to stay at reasonable prices, even existing prices. For those who wanted to bank with the Commerce Department on their shipping risk on insurance. So that's a good thing. And container rates from Asia to Europe are up 48 to 79%. So that's pressure number 1. Your costs are going up. Now here's pressure number 2. Consumers are pulling back. Bank of America surveyed Americans in February and 62% of them said they're stressed out about spending because of tariffs and inflation. And that was before oil went up another 50%. Now, when oil spikes, prices and everything gets more expensive. The fuel, the shipping, the plastics, the food. That is something to consider, of course, in your personal life. Just be aware that increase is being felt everywhere. Consumers are doing what research calls value seekers. Now, it's not a new thing for you guys to seek value. If you're, you know, shopping, switching brands, waiting for sales, buying smaller quantities, And cutting some discretionary spending. That's kind of a normal economic supply and demand elasticity. So if you're hitting both sides of this, that's where costs go up 15 to 20%, right? And that's what ends up causing demand to come down because price becomes sensitive. And that brings us to the 3 bad options most sellers are considering, right? And why are they bad options and why could they fail? So when you're getting squeezed on margin, you've got 3 instinctive options. All 3 of them could be wrong if you don't execute them correctly. So let's unpack Option 1, you raise your price without changing anything else. That sounds rational. Costs went up 15%, so you raise your prices 15%, right? And here's why that could fail. If you raise your price 15% on Amazon, you just gave every competitor a chance to undercut you and take the buy box. And if you're selling direct to consumer, you just gave customers a reason to abandon their cart and price shop the 5 other sites that are similar to yours. And here's the most, you know, distressing part to something in terms of what sellers actually miss. When you raise your price without improving perceived value, you're not maintaining margin. You're actually losing customers to your competition, right? Which means your unit volume price drops, which means your fixed costs go up per unit, which means you have to raise prices again. And now you're in a death spiral, right? Race to the bottom pricing or race to the top pricing. It's kind of twofold depending upon how you look at it. So the bad option number 2 would be to shrink your product and hope nobody notices. We've seen that over the years, right? Cartons of milk, cartons of ice cream, everything going down. That's called shrinkflation. And fewer pills in the bottle would be one way of that. Fewer ounces in the bag, same price until it works, until customers actually notice. And, you know, if you're like me and anybody else that's shopping, you've noticed, you've caught onto it. 2024, 2025, shrinkflation became a political issue. TikTok videos exposed it. Subreddits were tracking it down. Amazon reviews were calling it out. And here's the Amazon problem on that side. Amazon shows their price per unit right below your main price, price per ounce, price per count. So even if the customers didn't notice you went from 60 to 50 pills, they see your price per pill went from 50 to 60 cents right next to your competitor who didn't shrink. And they click on the competitor. It's just how it works, right? And here's the bigger problem. Shrinkflation only gets worse. If you shrink in Q2 to protect margin, great. But what did you do in Q3? When your costs go up again, you can't shrink again. So shrinkflation. Isn't a strategy, folks. It's a one-time trick that destroys customer trust. The bad option number three: eat the cost and hope it's only temporary. And this is what most sellers with cash reserves do. They say this is temporary; costs will come down. I'll just absorb it in sixty to ninety days. Here's the problem: it's not temporary. All right, Iran doesn't just want to reopen the Strait of Hormuz; they want permanent control. They want to charge transit fees. And this week, Iran's parliament is finalizing a bill to make those fees official. So even if the war ends, shipping costs might not come down, not right away. And this could become a new baseline because we all know how that goes. Things typically go up, you know, they typically go up, they don't go down, right? So if you're eating a 15% cost increase and waiting for it to go away, you're not being patient. You're subsidizing your customers and your cash reserves, and eventually you could run out of cash. So those are the 3 bad options. Raise your price without improving value, lose the customers, shrink your product, lose trust. Eat the cost, lose cash. And here's the framework for the right option. So the framework and the right way to protect your margin. Okay. The right way to protect your margin isn't about choosing between price, product size, and cost absorption. It's about making all 3 decisions strategically as part of a cohesive plan. So here's how it goes. First step, calculate the true cost of the increase. Most sellers are underestimating their cost by increasing because they are only looking at the customer surcharge. If you do the math, Let's do it. You're importing from China. Your landed cost before the war was $10 per unit, your product cost and shipping duties included. Now, shipping surcharge is $4,000 per container. A 20-foot container holds about 2,500 of those units, about $1.60 or so per unit. But that's not your only cost increase, is it? Add fuel surcharges, your freight forward, add increasing customs brokerage fees. And because the charge was based on shipment value and tariffs increased that, You need to add the increased costs, right? Because oil and prices affect trucking, right? And increased packaging costs because the plastics are made from oil and oil just went up 50%. So your true cost increase isn't $1.60, it's closer to $2.50 per unit. And your landed cost went from $10 to $12, that's roughly $12.50. That's a 20 to 25% increase, not a 16% increase. So step 1 is get the real numbers, right? Don't guess. And of course, those are unit economics. That would flow specifically to your product. So as we go through step 2, we need to model the different scenarios, right? We talk about this on other podcasts. Your price for the world is as it is, not the world you wish it was. So let's model these scenarios. Scenario A, costs stay elevated for 3 months. That's optimistic. The war ends, the strait reopens, costs come down by June. Scenario B, costs stay elevated for 6 months. Realistic. The war drags on or it ends, but Iran keeps control and charges fees because why not? They can. So Scenario C, costs stay elevated for 12+ months. Pessimistic, but possible. And this trade stays closed or controlled, and this becomes the new normal. So here's the price. Here's the key. The price for Scenario B. If you price for Scenario A and Scenario B happens, you are scrambling to raise prices again in Q3. If you price for Scenario C and Scenario A happens, you got extra margin. So price for Scenario B, 6 months of elevated costs. All right, now step 3, deciding what you're optimizing for during this process. Here's where most people will mess up. They try to optimize for everything. They wanna keep their price low, keep their product size the same size, keep their margin high, and keep their customers happy. And you can't do all 4, guys. You need to decide what are you optimizing for. Optimize for market share. Keep your price point low, eat some margins, win the customers while customer and competitors raise their prices. This works if you've got cash reserves and you're playing a long game. Option 2, optimize for margins. Raise your price, accept some customer loss, protect your profitability. This works if you've got a differentiated product and you're not competing on price. Option 3, optimize for trust. Keep your product quality and size the same, raise your price slightly, and communicate why. This works if you've got a loyal customer base and a strong brand equity. Most operators should customize for option 3, trust. And here's why. A trust-based pricing strategy. All right, here's what we're playing for. Framework 1 would be to raise your price, but not the other way. Your cost went up 20%. Don't raise your price by 20%. Raise it by 12 to 15% and eat 5 to 8%. Why? Because if you pass through 100% of the cost increase, you're giving competitors room to undercut you. And if you eat 100%, you're bleeding margin for no reason. The sweet spot is to pass through 70 to 80%, eat 20 to 30%. So let's use our example. Your landed cost went from $10 to $12.50. That's a $2.50 increase. If you were selling at $25, your margin was $15. Now it's $12.50 if you don't raise your price. Raise your price to $27. That's an 8% increase. Now your new margin is $14.50. You gave up $0.50 of margin, but you're still at a 53.7% margin. Instead of 50%. And here's the key. You're not the most expensive option on Amazon. You're competitive, but you protect most of your margin. And if you happen to be the most expensive option on Amazon, good for you. Framework 2, improved perceived value before you raise your price. Here's what separates operators from sellers and CEO operators. Let's be very clear. Sellers raise their price and hope customers don't notice. Okay. Operators raise their price after they've increased perceived value. What does that look like? Upgrade your product images, better lifestyle shots, better infographics, better A+ content. And as a bonus, include a free book, an ebook, a free guide, a free accessory. Cost to you is minimal, and the perceived value to the customer could be significant when targeted specifically to your customer need. Improve your packaging. Customers don't see shrinkflation as saving money. They see upgrading packaging as added value. So launch a bundle instead of just selling one unit at $27, sell a 3-pack at $75, same price per unit, but now you've increased your average order value and your perceived value. This is the goal. When you raise your price from $25 to $27, the customer should think they raised the price, but they also made the product better. Communicate the risks if you're in DTC and communicate the increase. If you're in the direct-to-seller channel, you can communicate directly. If you're on Amazon, it's You can't communicate directly. Okay. But you can send an email if you're on the direct-to-consumer world, your Shopify email list, et cetera. 2 weeks before the price increases, due to increased shipping and logistics costs related to global supply chain disruptions, we're adjusting our price effective May 1st. We work hard to minimize the impact, but we want to be transparent with you about why this change is necessary. That gives them a 10% off code before they, if they order before May 1st, you'll get 3 wins. One, the cash flow boost from customers who stock up. 2, customers feel like they got a good deal. Yay, customer. And 3, you've communicated transparency, which builds trust. The 4th thing is to reframe the value for the customers who do stay. Once you've raised your price, you need to reframe value for the customers who are now seeing a higher price. Value isn't cost per unit, it's cost per use. So if you're selling a $27 supplement for 60 days, your prop value isn't $27, it's $0.45 per day. If you're selling a $30 kitchen tool that lasts 10 years, your prop value isn't $30, it's $3 per year. This shows the value of your product and do it in the product descriptions. Cost per wear, cost per use, lifetime value. It shows up in comparison charts. Okay. Your product versus cheaper competitors shown over 6 months. The goal again is to shift the customer's mindset. This costs $27. Oh my. To this costs 45 cents per day and it's a better quality than the $22 option that I'll have to replace in 3 months. It's the psychology of the buyer in case you didn't catch on, folks.

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So the 5th section we talk about here is shrinkflation. What is it? I mentioned it a little bit earlier. Let's address it really quickly. Should you ever shrink your product? That's the real question, right? Yes, but only if you do it transparently. Here's the rule: don't shrink your existing product and help customers and hope they don't notice. That's really the key, right? That's deception. Instead, introduce a new size at a new price point. Keep your $60, you know, 60-bottle count at $27, but introduce a 30-count bottle at $15. Okay, now you're not shrinking, you're giving customers options, right? The value seeker who can't afford $27 buys the $15 option. The loyal customer who wants the best value pays the $27 because Well, cost per unit cost is lower. And here's the bonus. Some customers will buy the 30-count, realize they love it, and upgrade to the 60-count next time. This is tiered pricing, and it works because you're not hiding anything. But if you're going to shrink your existing product, do it transparently. Change the title, change the images, make it obvious. New 50-count size, now $25. Customers will understand a product size change if you're honest about it, but they won't understand deception. Okay. The long game. Why this will matter beyond the second quarter. Here's the most important thing sellers miss. This isn't about the second quarter. This is about the next 12 to 18 months because here's what's coming. With the Strait of Hormuz being affected, it is also affecting fertilizer shipments. The Gulf produces 50% of the world's urea and 30% of its ammonia, and fertilizer prices have gone up 47%. This is happening during spring planting season in the Northern Hemisphere. Which means reduced crop yields will be happening this year, means higher food prices most likely in 2027, which means consumers will cut discretionary spending even more. So if you make short-term decisions right now that destroy customer trust, you won't have those customers in 2027 when you need them the most. So the CEO operators who will win in the next 18 months are gonna be the ones who protect margin without destroying brand equity. In other words, don't be opportunistic. Okay? This means raising prices strategically, improving perceived value. Communicating transparency and optimizing for trust instead of short-term margin. The operators who lose are the ones who will shrink their products, race to the bottom pricing, and hope the problem just goes away. And it's not going to go away, folks. So in closing, let's wrap this up. If you're getting squeezed on margin, costs are up 20%, customers are pulling back, you've got 3 options. Raise your price without improving value, shrink your product and hope nobody notices, eat the cost and run outta cash. All right, so here's the right option. Calculate your true cost increase. Don't guess. Model 3 scenarios. Price for 6 months of elevated costs. Decide what you're optimizing for: market share, margin, or trust. Most operators and CEO operators should optimize for trust. Raise your price 70 to 80% of the total cost increase and eat 20 to 30% of it. Improved perceived value before you raise your price. Better images, bonuses, packaging bundles, the things we spoke about earlier. Communicate the increase. If you're on a DTC channel like Shopify, give customers a heads up and a discount code. Reframe the value as cost per use, not cost per unit. And if you're going to shrink, do it transparently. Introduce a new size at a new price. Don't deceive. The crisis that can come out can wait. There's a structural shift and you're gonna have to adapt to the changes that are happening in the market. This is not the first time we've experienced these kinds of changes, but understand the operators who protect margin without destroying trust are the ones who will still be here in 2027. If this episode helped you and you think through your pricing strategy and you're working on it, share it with another CEO operator or even a seller or someone interested in becoming an e-commerce seller as they listen to this. Again, I'm Neil Twaq. It started imperfectly, guys, remember, and something solid tends to happen along the way. See you on next Friday's episode. Ask you this. If you're serious about building an e-commerce business starting on Amazon FBA, what if myself and my team worked with you one-on-one to execute the steps outlined in the podcast while helping you discover what the heck to sell? How to make sure it's profitable, and how to successfully launch a brand, plus how to do it under a consulting plus performance-driven model where I put a $10,000 skin-in-the-game guarantee for those that show up and are serious about building a real business done with us? If yes, text keyword profit to +1-417-413-4209. That's 1-417-413-4209, and I will personally respond with a few simple questions. If you're not in the US or Canada, please visit voltage dm dot com. That's voltage dm dot com. Click get started and book a no-pressure discovery call with me or a member of my team to learn more about the Business Builders one-on-one coaching and mentoring for CEOs, entrepreneurs, and those looking to build an empire or retire using the power of e-commerce. Once again, thank you for listening, and be sure to tune in next week for a brand new episode of the High Voltage Business Builders podcast.