Tariffs can shake the foundation of your cost structure. When sourcing from countries like China or Vietnam, a new tariff can raise unit costs overnight, and retailers are left asking “what now?”

Do you absorb the hit and take a margin loss? Pass the cost to customers and risk losing volume? Change suppliers? Cut quality?

These are common responses. But they’re also short-term fixes. At best, they buy time. At worst, they chip away at brand value, customer trust, and long-term profitability.

Instead of reacting in the moment, brands need a more strategic approach, one that considers both cost and demand, and makes pricing decisions based on data, not guesswork.

That’s where price elasticity comes in. When you understand how sensitive your customers are to price changes, you can raise prices just enough to offset higher costs without losing more sales than you can afford.

In this post, we’ll break down how to do that, and how to use tools like elasticity modeling and scenario planning to make smarter, margin-protecting decisions in the face of rising costs.

What is Price Elasticity in Retail?

Price elasticity of demand tells you how much your sales will change if you change your prices.

• If a product is elastic, a small price increase causes a big drop in sales.
• If it’s inelastic, sales stay mostly the same even if the price goes up.

The formula looks like this:

Elasticity = (% change in quantity sold) ÷ (% change in price)

So, if you raise your price by 10% and your sales drop by 5%, your elasticity is -0.5 (and that’s considered inelastic).

In fashion, most non-luxury products are somewhat elastic, meaning price changes impact demand, but not always to the same degree.

• A product with a price elasticity of –2 is highly elastic: a 10% price increase leads to a 20% drop in sales.
• A product with elasticity closer to –0.5 is inelastic—sales drop only 5% for that same 10% increase.

Some essentials or well-known basics might even be closer to –0.3. The actual elasticity depends on the category, the customer, and how unique or substitutable the product is.

How Do Tariffs Affect Your Costs and Margins?

Let’s say your cost per unit goes up 30% due to tariffs. You have two options:

1. Eat the cost. That hurts your margins.
2. Raise prices. That might hurt your sales.

Neither option is perfect. Let’s walk through an example and calculate how to protect margins.

Scenario: Margin Impact of a 30% Increase in Cost of Goods Sold (COGS)

Let’s assume you sell a product with:

Original COGS: $20

Original Gross Margin %: 80%

This implies the Price is $100 (because $100 - $20 = $80 margin, which is 80%)

COGS Increase by 30%

New COGS = $20 × 1.3 = $26

Now, if you keep the price at $100:

New Margin $ = $100 - $26 = $74

New Margin % = ($74 / $100) × 100 = 74%

So, without a price increase:

Margin $ drops by $6

Margin % drops by 6 points

So how do you find the right price increase that covers your new costs but doesn’t tank your sales?

How to Maintain Gross Margin Dollars When Costs Rise

You want to maintain the $80 margin dollars despite the increased COGS.

Target Price=COGS (new) + Margin $ (original)=26+80=$106

New Margin % at $106 Price:

‍Margin %=(106−26/106)×100=75.5%

So to protect your margin $, you need to:

• Increase price to $106
• Which is a 6% price increase
• You preserve margin dollars, but margin percent still drops from 80% → 75.5%

Key Takeaways

• A COGS increase hurts both margin $ and margin %
• To protect margin $, you must increase price by at least the absolute COGS increase
• But even then, margin % will drop unless you increase the price more than proportionally
  

Of course, raising prices only works if your customers are willing to pay more. That’s where price elasticity comes in. Before you make any pricing decisions, you need to understand how sensitive demand is to price changes.

How to Estimate Elasticity for Your Products

If you're not already tracking elasticity, here’s how to start:

• Look at past promotions: What happened when you marked an item down 20%? Did volume jump 30% or just 5%?
• Compare similar styles: If one colorway sold well at $80 and another needed a markdown, that tells you something.
• Use category-level estimates: When product-level data is sparse, average it across a group (e.g., dresses or casual tops).
• Conjoint surveys: If you’re launching a new product and don’t have historical sales data to model demand, a conjoint survey can help estimate how customers will respond to different price points and features.

How Toolio Simplifies Price Elasticity Management for Retailers

Most retailers don’t have the time or tools to manually calculate price elasticity for every product.

Toolio helps you estimate and apply elasticity across your assortment, using a combination of historical sales data, pricing inputs, and category-level insights. You can:

• Identify which products or categories are price sensitive
• See how price changes will impact demand and margin in real time
• Run scenarios to test the effects of different pricing strategies
• Optimize pricing at both the product and category level—before the season even starts

And when you’re planning for tariff-driven cost increases, Toolio can help you pinpoint where to raise prices, where to hold steady, and how to protect margin without losing volume.

It takes the guesswork out and helps you make pricing decisions with confidence, backed by data.

Case Study: How Boll & Branch Uses Toolio for Pricing Decisions

Boll & Branch, a leader in sustainable luxury bedding, turned to Toolio after outgrowing Excel-based planning. As they scaled, reacting to cost changes became a slow, manual process. Today, that’s changed.

“One of the biggest changes [using Toolio] has been the ability to see cost impacts immediately. Before, we’d spend hours manually calculating margin shifts in meetings. Now, we can make those decisions instantly.”
— Mike Carrozza, SVP of Product Strategy, Boll & Branch

Real-Time Pricing Adjustments with Toolio

By using Toolio, Boll & Branch gained real-time visibility into how price and cost shifts affect margins, productivity, and buying decisions.

When Should Retailers Raise Prices vs. Absorb Costs?

Use elasticity to guide your call.

If elasticity is low:

• You can raise prices without losing many sales
• Do it to preserve margin

If elasticity is high:

• Raising prices hurts too much
• You might be better off absorbing the cost, or only increasing prices slightly

Deciding Price Adjustments Based on Elasticity

Most products fall somewhere in the middle. That’s why a calculator like this is helpful. It quantifies the tradeoff.

Why Price Elasticity Matters for Retail Pricing Teams

You don’t have to guess anymore. Price elasticity helps you:

• Make smarter price adjustments
• Plan for margin impact during economic turbulence or cost hikes
• Run more effective promotions (or avoid unnecessary ones)
• Forecast demand more accurately

Instead of blanket price hikes (which rarely work), you can make targeted adjustments, by product type, by category, or even by customer segment.

Final Thoughts on Managing Margins with Price Elasticity

Market conditions and cost increases are part of retail. But price elasticity gives you a way to respond with precision.

With the right strategy and tools, like Toolio, you can raise prices just enough to stay profitable, without alienating customers. And if you're using elasticity data across your assortment, you’ll make better pricing decisions overall. Speak to an expert to start optimizing your pricing strategy today!