[notcrazylol]

So if people buy an acer laptop, acer makes more profit? Quick math - if a laptop is retailing for 1000 and acer makes it for 500(just a random number), due to the tariffs, acer has to pay 550(10% extra) to bring it to the US and now sells it for 1100 due to 10% hike?

profit before = 1000-500 = 500 profit now = 1100 - 550 = 550

So the company is making more profit from you now? What am I missing?

[the_mitsuhiko]

> So the company is making more profit from you now? What am I missing?

You are probably missing that what people pay for their computers is still a function of the market and competition. If everybody goes up with their prices by exactly 10%, then maybe it would play out like that. Most likely though there are segments of the market where prices matter a lot to the customer and they won't be able to increase their margins. On the top of the line products it might be possible. On average I think they might slightly improve their margins, but it might also just be a wash.

[asdajksah2123]

We saw this throughout the pandemic.

Companies used the very real inflationary pressures to increase the cost of their products well beyond what those inflationary pressures alone would require.

There are 2 reasons IMO that led to this working:

1. If every company does it, the normal competitive market pressures to reduce prices don't operate. Normally, every company will only raise prices due to collusion, which would be illegal. But when there's a broad based increase in cost, every company will also raise prices beyond just the absolute values of those costs independently, because companies are judged by their margins more than they are by absolute numbers. This is not illegal but the effect is the same.

If in your example, Acer sells 1000 laptops, they originally made $1mm in revenues, with $500k in costs, leading to $500k in gross profits and a gross profit margin of 50%.

If their costs increase by 50%, they need to increase their selling price by $100 to maintain those margins. $1.1mm revenue, with $550k costs, leading to $550k gross profits for a gross profit margin of 50%.

If, however, they increase their Selling price only by the cost, their new selling price will be $1050, for revenues of $1.05mm, costs of $550k, gross profits of $500k, but gross profit margins declining to $500/$1050 = ~47.6%.

The decline in gross profits will hurt their stock price and their valuations (if private) significantly.

2. Consumer pressure. The other reason companies do not easily increase prices with higher costs is negative publicity. Pandemic related inflation, and now tariffs, give them an easy way to explain the reason for the price increases to their consumers and avoid facing any backlash directly.

What did surprise me with the pandemic, which will likely be true with the tariff increases, is that once the companies did increase their selling prices after the pandemic, even though their costs then subsequently dropped, they did not drop prices, across the board.

And the result were the record breaking profits companies have been declaring.

[phyzix5761]

> What did surprise me with the pandemic, which will likely be true with the tariff increases, is that once the companies did increase their selling prices after the pandemic, even though their costs then subsequently dropped, they did not drop prices, across the board.

Prices will only decrease when demand decreases. If your competitor offers a higher-value product and attracts more customers, you'll need to decide whether to increase the value of your product or lower your prices to remain competitive.

If the market can support your current prices there's no reason to lower them.

[bombcar]

Businesses are also very conservative - if you go to the Big Boss and say "we should increase our price 20%" you're likely to be shot down unless you can show WHY it must be done or you go bankrupt.

This means that competitive prices will be "lower" than what the market clearing amount should be. So when they are "forced" to raise them, they then find they're still selling, and will be slow to bring them back down.

Which does occur, but first as sales, then perpetual sales, and then a new product size that's coincidentally cheaper.

[9283409232]

Businesses are constantly doing a price sensitivity analysis to see if they can raise prices and by how much. Economic factors like tariffs allow you to raise prices more than your usual price sensitivity would allow because you can blame it on factors out of your control.

[phendrenad2]

It's true. But this isn't that strong an effect, because they still have to worry about competitors undercutting them.

[mrguyorama]

Except they really don't, because each aisle of your grocery store only has two actual companies making 90% of the products, and coke does not compete with pepsi on price

If Pepsi doubles in price but coke does not, you will not see most pepsi drinkers switch to coke, you will see a small amount of pepsi drinkers abstain, a small amount of pepsi drinkers switch to coke, and the majority of pepsi drinkers just grumbling about paying more.

We've had decades of shrinkflation at this point. I can't use a recipe from twenty years ago because it calls for 15.5oz cans when we've already moved to 14.7oz cans of that product. I can't buy a competitor's version because they use the same can and same can sizes.

A great demonstration of this is something I've been bitching about since "inflation" happened. Lays (the same company that owns pepsi) massively increased chip prices. So did their competitors. Our regional store brand DID NOT (because potato prices did not increase for over a year!). Our regional store brand is comparable to basic chips from other brands. Predictably, people just paid the higher price for lays and the competitors who also raised their prices.

The past several decades, companies realized that consumers have WAY MORE stickiness to a "brand" than ever realized. People still buy craftsman tools, including my father the contractor, despite them being cheap garbage for decades now. Companies don't compete on prices because there is only one competitor in each market segment, and they love the sky high profit margins too. It's not worth it to gain an extra 5% of the market by lowering your price significantly, which is what it would take to get the extra market share. Consumers aren't rational, they are tribal. Nobody drinks pepsi or coke, or prefers red vines to twizzlers, because of some rational evaluation of product merits.

What DID switch people from pepsi to coke was not price, but marketing!

[oa335]

Yes, they are likely making more per unit, but less profit in aggregate, since the increase in price means they will likely sell less laptops than before. The aggregate loss in value here is known as dead-weight loss.

[jedberg]

Yes. Most companies target a profit percentage, not a fixed amount. So if their costs go up, their profits go up. But since everyone does it, they end up still being competitive in the market.

[s_dev]

The demand side.

Less laptops will be bought even if profit per laptop goes up overall profits will go down. Money is finite and these are durable goods. People will now look at other options like the second hand market.

[csomar]

What you are missing is that they can't import the product for $500. They have to sell it to the "USA" for 1000 and pay 100 in tariffs. They can't "pocket" the profit in the USA. Look up https://en.wikipedia.org/wiki/Transfer_pricing

[tensor]

The value of the product when calculating tariffs isn't necessarily the manufacturing cost, it could also be the "market value". I tried to find a source for how to calculate the value on a complete laptop but a quick search failed me.

But, for example, when bringing wine into Ontario Canada, the duty is calculated on what the Ontario Liquor Board would sell the bottle for, not on what I pay for it. This isn't the US of course, but it gives you an example that tariffs are not always paid on manufacturing costs.

[phyzix5761]

They’re making more profit in absolute dollars, but the return on investment (ROI) is the same. ROI is what matters because investors trade cash for shares and seek a return on that cash.

For example, if you invest $1,000 and earn $100, your ROI is 10%. But if you invest $10,000 and earn $200, your ROI is only 2%, even though the dollar return is higher. Investors focus on percentage returns because they invest different amounts and receive profits proportional to their ownership.

Investors prefer higher percentage returns, even if the dollar amounts are smaller. For example, making ten separate investments that each return a smaller dollar amount but a higher percentage would be more attractive than one large investment with a lower ROI.

Lower ROI also comes with an opportunity cost. Capital tied up in a low-return investment can't be used for higher-return opportunities. Investors aim to allocate their money where it can generate the best possible return relative to the risk, rather than just chasing higher dollar profits.

In the example above Acer had to risk more capital and got the same percentage return on that capital.

[evanriley]

You're not missing anything. This is how every company has taken advantage of rising inflation and now tariffs.

[Macha]

Shareholders demand it, even. If your costs increased but your profits stayed constant after your price increase, then a small business owner might be perfectly happy with that. But it's a decline in profit margin so investors would go ballistic.

[DSMan195276]

The catch is that it costs them more to acquire the laptops so (in theory) they can't acquire as many of them to sell if they start from the same amount of money. Which is ok on the surface, but makes them a worse investment because they return less money back to you for the same amount put in.

Ex. If they only have $1M to spend, the tariffs mean they can only buy ~1800 laptops to sell instead of 2000, so if the profit of $500 stayed the same then the company is making less money than it did before. If they instead bump the margin for each laptop to $550 then they make the same amount of money as before even though they're selling less laptops.

Of course in an actual version it's messier because the math doesn't work out that cleanly. If it costs $800 to make a laptop you sell for $1000 then it now costs 880 with a 10% tariff. To keep the 20% margin the new price would be $1056, only a 5% increase in the final price.

[rco8786]

They would only hike the price by $50, not just blanket 10% for no reason.

The CEO called out 10% because the tariffs themselves are higher % of COGS.

[ojbyrne]

That's the same percentage profit. And there would likely be some reduction in sales due to the increased price, so the absolute profit wouldn't increase as much as you suggest. Obviously lots of other factors involved.

[IncreasePosts]

Not every country is subject to the tariffs.

If apple assembles their MacBooks in Vietnam, they get a 10% discount relative to Acer laptops assembled in china

[lesuorac]

> So the company is making more profit from you now? What am I missing?

Yes. The elasticity of Tariffs is historically >1.

[randcraw]

The basics of pricing theory, that higher prices reduce demand.

[knowitnone]

tariffs mean the company has to pay the county money sort of like an extortion fee. profit is still the same and the US gets the 10%.

[shrikant]

Why do you assume their costs are going up the same percentage? It's not clear from the linked article, but maybe their costs per your example are going up 12% from 500 to 600, and they're only raising prices by 10% to 1100 to keep the same margin.

Of course I doubt this would actually be the case (because capitalism), but that's the one of the assumptions you're missing in your example.

[manojlds]

Yeah exactly, companies just have to say the price increase is due to tariffs and increase their margins. That's exactly what Acer CEO is doing here.