profit before = 1000-500 = 500 profit now = 1100 - 550 = 550
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.
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If in your example, Acer sells 1000 laptops, they originally made $1mm in revenues, with $500k in costs, leading to $500k in gross profits and a gross profit margin of 50%.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.
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.
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.
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!
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.
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.
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.
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.
The CEO called out 10% because the tariffs themselves are higher % of COGS.
If apple assembles their MacBooks in Vietnam, they get a 10% discount relative to Acer laptops assembled in china
Yes. The elasticity of Tariffs is historically >1.
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.