The Complete Guide to US Tariffs & Kickstarter

Key Concepts

• Tariff: A tax on the declared value of a product entering the US.
• Declared Value: The cost to produce a product, as shown on the commercial invoice.
• Landed Cost: The cost to get one unit to your fulfillment center.
• Gross Margin: Retail price minus the cost of goods sold (COGS).
• COGS (Cost of Goods Sold): The direct costs attributable to the production of the goods sold by a company.
• HTS Code: Harmonized Tariff Schedule code, used to classify products for import duties.
• DDP (Delivery Duty Paid): A shipping term where the seller is responsible for all costs and risks until the goods are delivered to the buyer's specified location.
• Diminimis: A minimum value threshold below which goods are exempt from duties and taxes.
• CPM (Cost Per Mille): Cost per thousand impressions, a metric used in advertising.

Tariffs: The Basics

• A tariff is a tax on the declared value of your product entering the US, based on the commercial invoice.
• The tariff is not based on the retail price of your product.
• Example: If it costs $10 to produce a product and there's a 145% tariff, the tariff is $14.50.
• The speaker stresses that 145% is only on specific product categories.

Framework for Navigating Tariffs

The speaker presents a three-step framework to navigate tariffs:

1. Think about your retail costs:
   • Traditionally, retail price is calculated as 5-7 times the landed cost.
   • The speaker recommends basing it on the cost to produce, as freight costs fluctuate wildly.
   • Example: $10 cost to produce with a 7x multiplier = $70 retail cost.
2. Calculate your target gross margin:
   • Gross margin = Retail price - Cost of Goods Sold (COGS).
   • Most creators aim for 40-50% gross margin to cover fixed expenses and support the business.
   • Dusty Dros uses a 40% gross margin across all sales channels.
   • The speaker emphasizes that the target gross margin can vary based on individual business needs.
3. Calculate your cost of goods sold (COGS):
   • COGS includes manufacturing cost, freight, last-mile shipping, payment processing, platform fees, advertising, and tariffs.
   • Example: $10 cost to produce + $2 freight + 25% advertising = $35 COGS.
   • Adding a 145% tariff ($14.50) to the COGS increases it to $49.50.
   • If the retail price is $70 and the target gross margin is 40% (target COGS of $42), the increased COGS due to tariffs puts the business above the threshold.

Options for Addressing Tariff Impact

The speaker outlines three main levers to pull when dealing with tariffs:

1. Audit all of your costs:
   • Critically evaluate every cost in the business.
   • Explore cost-cutting measures with manufacturers (different materials, locations outside China).
   • Cut weight by using lighter materials.
   • Re-evaluate the ROI on every marketing decision, especially those difficult to track (conventions, content creators, advertising outside Facebook/Instagram).
   • Invest in education and do some tasks in-house.
2. Charging for tariffs after the campaign:
   • Consumers are used to paying extra for shipping, state taxes, and VAT.
   • Most non-US backers already pay VAT, which is based on the sale price.
   • BackerKit is building tools to help collect tariffs easily post-campaign.
3. Raising your retail price:
   • Be cautious, as it's difficult to decrease prices later, especially with retailers/wholesalers.
   • Direct-to-consumer businesses have more flexibility in changing prices.
   • Dusty emphasizes the difficulty of lowering prices after raising them for wholesalers/retailers, as it can damage relationships.

Reasons to Proceed with Crowdfunding Despite Tariffs

The speaker presents five reasons to continue with crowdfunding launches:

1. You're not going to ship for a really long time:
   • Shipping is typically 6-12 months out, providing time for tariffs to potentially settle.
   • Tariffs are charged right before shipping, allowing for flexibility.
2. Advertising costs are going down:
   • Companies are cutting advertising budgets, leading to less competition and cheaper ads.
   • CPM (cost per thousand impressions) has decreased by 30% in April compared to March.
3. Freight costs are at 12-month lows:
   • Freight costs are at pre-COVID levels.
   • Overcapacity in carriers and potential resolution of the Red Sea crisis could lead to lower rates.
   • Justin from Arc Global Logistics notes that a "soft season" is expected, indicating continued low rates.
4. Backers are still backing campaigns:
   • No notable decrease in conversion rates since tariffs were announced.
   • Charging extra for shipping, tax, and VAT is already common.
5. Kickstarter reaches a global market:
   • 30-50% of funding typically comes from outside the US.
   • Examples: Tech product with 53% of backers outside the US, Aaron's project with almost 39%.

Q&A Highlights

• Anti-American Sentiment: Dusty believes that politics don't significantly affect consumer sentiment or the desire to buy products.
• Customs Valuation: Customs uses the commercial invoice value (cost to produce), not Kickstarter pledge amounts or retail prices.
• Tariffs on Freight: Tariffs are not applied to the cost of freight in the US.
• Time Limit for Paying Tariffs: Tariffs, duties, and taxes must be paid immediately at the time of entry.
• Tariff Date: The tariff rate is based on the date the boat departs the origin port.
• Shipping from Canada: Shipping direct to consumers from Canada results in tariffs based on the sale price, not the cost to produce. It's recommended to ship in bulk to a US fulfillment center to pay tariffs on the manufacturing cost.
• Lowering Tariffs: Forwarding products to another country doesn't lower tariffs, as they are based on the country of origin.
• Manufacturing Elsewhere: Manufacturing in Europe is generally more expensive than in China, but may be worth considering for stability.
• Tariffs on Rulebooks: Role-playing game books are considered games, not informational reading, and are therefore subject to tariffs.
• Raising Funds Post-Campaign: Dusty recommends offering backers the option to pay the tariff fee or wait until tariffs pass.
• HTS Code Determination: The speaker recommends providing a detailed description of the product, its use, materials, and origin to a customs broker for HTS code determination.
• DDP (Delivery Duty Paid): Justin clarifies that DDP means the seller is responsible for all costs and risks until delivery.
• Sourcing from Multiple Countries: If parts are made in different countries and assembled in one, the tariff may depend on the percentage of value added in each country.
• Campaign Timing: The speaker suggests that decreased competition and advertising costs may make it a good time to launch a campaign despite tariffs.

Conclusion

Navigating tariffs requires a thorough understanding of costs, careful planning, and clear communication with backers. While the situation is complex and rapidly evolving, creators have several options to mitigate the impact and continue bringing their projects to life. The key takeaways are to audit costs, consider charging tariffs post-campaign, and explore alternative manufacturing or shipping strategies.