For eighteen months, retailers absorbed tariff costs through margin compression. That cushion is running out. The retailers who panic and reach for the cost-plus formula will lose. The ones who treat price as a value decision will survive.
The 2026 inflection point
In the first quarter of 2025, when the new tariff regime began, most consumer-facing retailers made a quiet choice. They could pass the cost through to shoppers — or they could absorb it, protect market share, and hope the policy environment would settle. Industry analysts now estimate that retailers and suppliers absorbed roughly eighty percent of the tariff bill in 2025 through margin compression. Best Buy alone has projected a $1.2 billion pretax direct tariff expense for this calendar year. Consumer-facing companies collectively expected over twenty billion dollars of impact in 2025, and around fifteen billion more in 2026.
That cushion is gone. Mid- to late-2026 is the moment most analysts identify as the pass-through inflection point — the time when costs that have been silently eaten finally hit the shelf price. Every retailer I have spoken to in the last six months knows this. The question is no longer whether to raise prices. It is which prices to raise, on which products, by how much, and in what sequence.
And this is exactly the moment when most retailers reach instinctively for the wrong tool.
The cost-plus reflex
When I look across the retailers I have worked with in the last twelve months, the most common response to fluctuating costs is the simplest one: pass it through to everyone, uniformly, at the standard markup. Old cost goes up by ten percent; new shelf price goes up by ten percent. Defensible in a board meeting. Auditable down to the invoice. Comfortable.
It is also the fastest way to lose volume in a market where shoppers are already cautious. Recent FMI research shows that seventy-four percent of shoppers say their retailer helps them stay within budget — consumers are watching prices with a vigilance they have not exercised in a generation. A uniform cost-plus pass-through tells them, in effect, that the retailer has made no effort to absorb, no effort to choose, no effort to protect the products that matter most to their basket. They notice. And they switch.
A convenience store in Mexico
Take a convenience store retailer I have been working with in Mexico. Because of the tariff regime and broader supply chain volatility, they have been facing wildly fluctuating costs across their assortment. The problem is not that costs are moving. The problem is that they have not built the process or the team structure to manage cost change at this velocity.
Even the simplest pass-through — same markup applied to the new landed cost — becomes a daily exercise rather than a monthly one. If you do not stay on top of it, you bleed money. Either you keep selling at yesterday’s price on a product whose cost moved up overnight, in which case your margin disappears. Or you over-correct on a product whose cost moved down and lose competitive position.
For this retailer, cost data is changing on a daily basis. The pricing process is running on a weekly or monthly cadence. The gap between those two clocks is where the margin goes. They are not making bad strategic decisions. They are running an operational rhythm designed for a stable cost environment, in an environment that is no longer stable.
How it should be done
Cost pass-through is not a uniform decision. It is a product-by-product, segment-by-segment decision driven by price sensitivity.
When a cost increase hits a category, the right question is not “what is our standard markup?” It is “who is buying this product, and how much can they absorb?” If the product is one purchased predominantly by the price-sensitive segment of the economy — staples, basic produce, household essentials — the retailer should absorb a portion of the cost. Pass it on too aggressively and you lose the customer, often permanently. Conversely, if the product is bought largely by less price-sensitive segments — premium spirits, niche cosmetics, specialty categories — that is where the pass-through can land more heavily, smoothing the overall margin impact across the assortment.
The cost change is the same. The pass-through is not.
| Approach | Margin outcome | Customer perception | Volume risk |
|---|---|---|---|
| Full cost-plus pass-through (uniform) | Margin recovered short-term | Aggressive, untrusted | High |
| Full absorption (2025 default) | Margin compressed | Trustworthy, unsustainable | Low |
| Selective pass-through, no analytics | Mixed, unpredictable | Inconsistent | Medium |
| Sensitivity-based pass-through with analytics | Margin protected on profit drivers, volume protected on traffic drivers | Fair, considered | Low |
In RapidPricer case studies, a price movement of roughly two percent across the assortment — applied this way — translates into close to nine percent improvement in gross margin. The retailers reaching for the uniform cost-plus button right now are choosing the wrong two percent.
The competitive blind spot
There is one more thing worth saying about the 2026 environment that most pricing teams underestimate. Your competitors are facing the same cost changes you are — but they are not facing them at the same level. The cost increase from a supplier is not passed on uniformly to all retailers. A larger competitor with deeper negotiation power, or a longer relationship with the supplier, may be absorbing far less of the increase than you are.
This means competitive intelligence matters more in 2026 than it did in 2024. Your shelf price relative to the market is no longer a simple comparison; it is a comparison adjusted for who is absorbing what. If you assume your nearest competitor faces the same input cost shock you do, you will price defensively against a position they may not actually hold.
Why retailers stay stuck
The most honest answer I have ever heard about why retailers do not change their pricing approach is some version of this: “Playing it safe. We know this is not going to upset anyone. The business will not be in trouble. Why change something that is working?”
That is not stupidity. It is risk aversion dressed up as discipline. And in the second half of 2026, it is the most expensive form of risk aversion in retail. The thing that “is working” is working only because the tariff cushion was real, the consumer was patient, and the cost environment was tolerable. All three of those conditions are now changing at once.
What to do this quarter
If you take one thing from this article, take this: do not begin by replacing your entire pricing process. Begin by understanding what your data is already telling you.
Pick your top twenty products by volume. Pull your prices, your competitor’s prices, and your sales data for the last twelve months. Identify which of those products are bought by which customer segments. Look at where your prices sit relative to the market and what happened to your volume the last time you moved a price. You will find products where your customers care intensely — the items they remember and compare across stores. And you will find products where they do not.
The retailers who win the second half of 2026 will pass through cost increases on the second category, absorb them selectively on the first, and run the process daily rather than monthly. The ones who don’t will keep adding a percentage on top of cost, defending the formula, and quietly wondering where the volume went.
Kiran Gange is the Founder and CEO of RapidPricer and the author of The Expert Guide to Retail Pricing (Routledge). He has twenty-one years of experience in retail pricing across the United States, Europe, Latin America, and Asia.