Do Tariffs Affect PPC Advertising?

The answer is definitely: Yes.

When new tariffs are imposed or existing ones are expanded, the fundamental cost structure of goods changes, and companies’ bidding behaviors also shift:

• Some companies will increase their bids to secure the best ad positions, hoping to maintain existing profits.
• Some companies will maintain their current bid levels in the short term, but ad spend may still rise (influenced by other advertisers increasing their bids, leading to an overall industry CPC increase). In the short term, they’ll choose to absorb costs to maintain market share.
• Other companies will choose to exit this new round of competition, shifting their marketing budgets to other channels.

What are Tariffs?

A tariff (Customs Duty) is a mandatory tax levied by a sovereign nation or economic entity on imported goods as they cross its customs border. It’s one of the most common forms of trade barriers in international trade, enforced and collected by customs agencies.

Core Purposes of Tariffs

Key Characteristics of Tariffs

• Pass-through : Tariff costs are typically transferred through the supply chain, ultimately borne by consumers (e.g., increased prices for imported cars).
• Dynamic : Tax rates adjust with policy changes (e.g., WTO negotiations, trade agreement implementation, anti-dumping rulings).
• Regional : Tariffs on the same goods vary significantly across different countries (e.g., the US levies a 25% tariff on Chinese solar panels, while Southeast Asian countries might only levy 5%).

Direct Impact of Tariffs

1. Importers/Cross-border Sellers: Cost Pressure

• Soaring Procurement Costs: Tariffs are added to the cost of goods, directly squeezing profit margins. Example: Original $10,000 goods, after a 15% tariff, cost rises to $11,500.
• Supply Chain Restructuring Pressure: High tariffs force businesses to find alternative production locations (e.g., moving production lines from China to Vietnam) or switch to local suppliers.
• Cash Flow Challenges: Prepaying tariffs ties up operating capital, potentially leading to cash flow disruptions for small and medium-sized enterprises.

2. Consumers: Bearers of Higher End Prices

• Price Pass-through Law: Studies show that over 85% of tariff costs are transferred to consumers through price increases (Peterson Institute, 2019). Example: After the US imposed a 25% tariff on Chinese furniture, retail prices for similar goods increased by an average of 15%-20%.
• Distorted Consumer Behavior:
  • For essential goods (e.g., medicines), demand elasticity is low, forcing consumers to accept higher prices.
  • For optional consumer goods (e.g., electronics), sales may decline significantly.

3. Market Competitiveness: The Balancing Act Between Domestic and Imported Goods

How Tariffs Affect PPC Advertising

Increased Costs -> Increased Prices -> Changes in Consumer Demand and Willingness

As mentioned, increased costs are ultimately borne by consumers. Facing price increases, consumers’ purchasing demand and willingness will also change significantly, affecting PPC ad performance:

• Lower Click-Through Rate (CTR): Higher prices reduce product appeal. Even if users see the same ad, their willingness to click on it will decrease.
• Lower Conversion Rate (CVR): Similarly, for users who have already added items to their shopping cart, a higher price barrier might lead them to abandon the purchase, resulting in a lower checkout rate. Moreover, existing product price monitoring tools make such price comparisons more transparent and noticeable.
• Affected Ad Relevance Score: If users are price-sensitive, lower CTR and CVR will reduce ad quality score/relevance score, indirectly pushing up cost-per-click or reducing ad impression frequency.

Price Increases -> Weakened Competitiveness -> Changes in Keyword Bidding Environment

Compared to domestic competitors unaffected by tariffs, or competitors from low-tariff countries/regions, your product’s original price advantage weakens or even disappears, impacting ads as follows:

• Higher Bids Needed to Maintain Ranking: To maintain the ad’s original display position despite reduced price competitiveness, advertisers need to increase keyword bids.
• Intensified Market Share Competition: Competitors (especially domestic ones) may seize the opportunity to increase ad spending, driving up overall market keyword bidding levels.

Compressed Profit Margins -> Restricted Marketing Budget -> Ad Spend Adjustments

Tariffs erode seller profits (especially if the increased costs cannot be fully passed on to consumers), potentially leading to cuts in advertising budgets. At the same time, maintaining original ad return on investment (ROI) targets becomes more difficult with rising costs and increased bidding pressure. This may necessitate pausing underperforming ad campaigns, more precisely targeting high-value audiences or high-profit products, which also indirectly constrains ad budgets.

Supply Chain & Inventory Fluctuations -> Affected Ad Delivery Stability

Tariff changes (especially sudden ones) can lead to supply chain disruptions, customs clearance delays, and unstable inventory (stockouts or overstock), which in turn affects advertising:

• Ad Blind Spots or Waste: If products are out of stock due to customs issues, but ads are still driving traffic, users cannot make purchases, leading to significant waste.
• Urgent Adjustment Needs: Requires quickly pausing relevant ad groups or adjusting inventory information (e.g., using dynamic ad inventory filtering).
• Inaccurate Brand Positioning: Overstocked inventory may require increased promotional ad spend, potentially deviating from core positioning.

Note: Not All Advertisers Will Be Affected

Different products and industries are affected differently by tariffs, mainly depending on the following points:

• Product Type: Necessities vs. optional consumer goods (necessities may be less affected, optional consumer goods are more price-sensitive).
• Price Elasticity: Products with high price elasticity (consumers are price-sensitive) are affected far more than products with low price elasticity.
• Brand Power: Strong brands have greater pricing power and consumer loyalty, allowing them to better resist some of the negative effects of tariffs.
• Market Competitive Landscape: The intensity of market competition influences the ability to pass on costs and the extent of changes in the bidding environment.
• Seller Size and Flexibility: Large sellers may have more resources (e.g., overseas warehouses, multi-country布局) or bargaining power to buffer the impact; small sellers are more flexible but have less risk resilience.

Will Tariffs Inevitably Lead to Higher PPC Ad Prices?

Based on the previous analysis, tariff-induced cost increases will most likely lead to higher PPC ad costs. However, I want to discuss the possibility of costs remaining stable or even decreasing:

PPC Ad Prices May Remain Stable Due to Tariffs

• Sellers Choose to Absorb Costs: Some stronger sellers may temporarily choose not to raise prices, absorbing the increased tariff costs themselves. Their ad strategies and bidding behavior may remain temporarily unchanged, thus keeping CPC stable.
• Inelastic Market Demand: If the product is a necessity or has very low demand elasticity (consumers are not price-sensitive), even if sellers pass costs on to consumers leading to price increases, demand may not drop significantly. Sellers’ ad strategies may change little, and CPC remains relatively stable.
• Precise Optimization Offsets Pressure: Sellers control traffic quality and costs by more refined keyword selection, negative keyword settings, and audience targeting optimization, only targeting high-value users, offsetting some of the negative impact of a deteriorating bidding environment.

PPC Ad Prices May Decrease Locally or Short-Term Due to Tariffs

• Some Competitors Exit or Drastically Cut Ads: If the tariff impact is too great, causing some sellers (especially small sellers or those with thin margins) to completely stop advertising or drastically cut budgets, the intensity of competition for specific keywords temporarily decreases, which may lead to CPC reductions.
• Sellers Strategically Scale Back Ad Spend:
  • Focus on Long-Tail/Low-Competition Keywords: Sellers may actively abandon competitive, high-CPC popular broad keywords, instead targeting long-tail keywords with lower search volume, more precise intent, and less competition, which inherently have lower CPCs.
  • Reduce Ad Targeting Scope: Sellers may only advertise to core markets, high-loyalty users, or their most profitable product lines, avoiding the most competitive areas, thus observing an overall or localized CPC decrease.
• Overall Market Demand Significantly Shrinks: If tariffs lead to widespread, significant price increases across an entire product category, and consumer demand plummets, overall market search volume and ad activity decrease, competition weakens, which may lead to CPC reductions. However, this is usually accompanied by a larger decline in sales, which is not good for the overall market.

Advertiser Response Strategies

So, what can we do?

1. Inventory Current Conversion Rates by Market Check conversion rates by market. If conversion rates are declining in a specific country/region while remaining stable elsewhere, and the profit in that market no longer supports the marketing budget, then consider reducing or even pausing ad spend and reallocating the budget.

2. Re-evaluate Pricing and Value Proposition Carefully calculate new product costs and determine the cost pass-through ratio (fully transferred, partially transferred, temporarily absorbed).

3. Reallocate Ad Budget Based on 1 and 2

   • Scale back inefficient markets: For countries/regions with high tariff rates and significant sales declines (e.g., the US imposing a 25% tariff on specific categories), reduce the budget by 20%-50%.
   • Explore alternative markets: Increase budgets in lower-tariff regions (e.g., Southeast Asia, the Middle East). Example: Shift 30% of the original US budget to Saudi Arabia or Mexico.
   • Focus on high-profit products: Pause ads for products heavily impacted by tariffs and prioritize categories with profit margins >40% (e.g., accessories, domestically produced goods).

4. Adjust Smart Bidding Settings If you’re using target Return on Ad Spend (ROAS) or Cost Per Acquisition (CPA) bidding, you’ll need to set new target prices based on the new cost structure.

5. Optimize Audience Targeting Exclude audiences with potentially low conversion efficiency. Available conditions include but are not limited to: geographic location, life events, search intent, YouTube content viewed, etc.

6. Optimize Keywords, Creatives, and Landing Page Content

   • Further emphasize non-price value propositions: durability, warranty, local support, sustainability, eco-friendliness.
   • If product prices are increasing, ensure this change is transparent, helping customers understand why prices are rising.
   • Further enhance credibility with customer reviews, return guarantees, shipping policies, etc.

7. Align with Supply Chain and Inventory Management

   • Communicate closely with the supply chain to anticipate the impact of tariff changes on inventory.
   • Utilize PPC platform inventory linking features (e.g., Google Merchant Center’s inventory feed) to automatically pause ads for out-of-stock products.
   • Plan promotional activities in advance to clear potentially accumulated inventory.