What is a Landed Cost?

A landed cost or landed price is the total cost sustained while transporting a product from the supplier to its intended destination. This cost is determined considering several factors -- the product's price and any other expenses incurred directly in obtaining the product, including the shipping and freight charges.

If you are importing goods, the landed cost will also include expenses such as costs involved in customs clearance, duties, insurance, taxes, storage requirements, and others. In this case, the landed cost is the total of all these additional expenses and fees. The landed cost is calculated per unit and reflects the total cost of each unit instead of the entire shipment. The unit can be defined as per the individual products, volume, and weight of the item. This can help you calculate the cost of shipping one product or a portion of the shipment.

In short, the landed cost is the total of your purchase price, freight shipping, insurance, potential taxes, and customs duties, transaction fees, brokerage fees, port or terminal fees, and all the other extra costs borne to transport the shipment through the dock door.

Why is the Landed Cost Important?

As an entrepreneur, you must have a clear idea about the landed cost of your products in advance, as this can help you make the right business decisions. If you plan to import products and sell them in the local market, you must have clarity on the landed cost of the products to affix their selling price and make a decent profit.

Understanding the landed cost of imported products will also allow you to take a call on the capital that has to be invested in purchasing and delivering the goods to the desired location. When you have an exact figure that includes all the expenses and other components, you can calculate the total cost price and then decide on applying the right selling price to avail maximum profits.

If you do not take the time to understand and calculate the landed cost, you could face unexpected fees and unforeseen charges that could make importing the products unviable.

What are the Components of Total Landed Cost?

As stated earlier, several components account for the total cost of buying goods. Any factor or cost contributing to the expenses you incur in fulfilling orders and getting the items to your buyer can be regarded as a cost component.

There are five such components that are considered while calculating the total landed cost.

What are the Components of Total Landed Cost

1) Product costs

The cost of the product refers to those costs incurred in manufacturing the product or acquiring it from the manufacturers or suppliers. This cost includes the price of raw materials used for making the product and the other manufacturing components. This cost can be reduced by streamlining your manufacturing processes and looking for cheaper sources of raw materials or obtaining supplies from manufacturers who sell the product at a favorable price. This will allow you to achieve a good profit margin.

2) Shipping costs

This involves the cost of transporting goods from the suppliers to the various fulfillment centers and ferrying the same to customers. Shipping expenses include handling fees, freight, and transportation charges. This cost may vary depending on the import and export processes you utilize. Some of the factors that determine the shipping costs are shipping zones, delivery speed, and the weight of the package.

You can reduce shipping costs by negotiating better carrier rates or partnering with third-party logistics providers in different locations so that your inventory is stored closer to your end customers. This will help reduce shipping costs and transit times. You need to know the cost per unit of sending shipments to customers to plan accordingly.

3) Customs fees

In all international trade transactions, you have to pay import and export fees. Duties, tariffs, brokerage fees, harbor fees, taxes, value-added tax (VAT), and other customs regulatory fees are all part of customs-specific expenses.

Customs, taxes, and duties are mandatory and unavoidable. However, you can reduce these costs and manage them better by possessing fulfillment centers in different countries that allow you to ship domestically and avoid these additional charges.

4) Risk coverage costs

The risk coverage costs include insurance expenses and any other quality assurance and compliance fees. Although shipping insurance is optional, taking it will secure your consignment. The charges incurred in protecting your cargo while in transit must be factored in your bottom line.

5) Overhead costs

Overhead costs involve inventory carrying costs, salaries/wages for staff and other members, payment processing fees, exchange rates, and any other costs associated with the import-export business operations.

Collating all these costs may prove to be a challenge. You have to track expenses across several parties -- manufacturers, shipping partners, carriers, or freight service providers. You also have to factor in potential costs such as customs, taxes, and inspections. Also, additional charges may arise from tasks associated with procurement, sourcing, warehouse labor, and some within the organization. It may be relatively easy to track data on internal specific goods or timeframes. However, you may struggle to capture data over a particular timeframe or split it up in a way that makes calculating landed costs easy.

Is the Landed Cost the Same as the Cost of Goods Sold (COGS)?

The Cost of Goods Sold (COGS) is a small component of your landed cost and not the whole part. That is why the landed cost includes the COGS and a host of expenses associated with distribution, fulfillment, and labor.

If you are a manufacturer, the COGS will predominantly include all expenses related to labor and materials. If you are using the dropshipping route or running a marketplace, the COGS will primarily be about the cost of purchasing the products you want to sell.

Some organizations deal with advanced COGS calculations to help you get a better understanding of overall development and sales. This calculation may include salaries for production or contractors or the commissions you pay for affiliates. COGS calculations are done per unit.

How to Calculate the Landed Cost?

Collecting all the invoices and records involved in the shipping process will help you determine the unit cost of a product. When you have obtained and organized all the necessary records, classify your expenses as per the five components stated above to calculate the landed cost.

The formula is to add the following components:-

Unit cost + shipping costs + customs fees + risk coverage costs + overheads = landed cost per unit

Every purchase order must contain this information as discounts or free shipping offers may cause costs to vary from one order to another. The result being, the same product can have a different landed cost across various purchase orders.

How to Calculate the Landed Cost of Imported Products?

For instance, you have purchased 250 units of a purse for US$ 10 each, for a total of US$ 2500. The shipping costs add to US$ 500; duties are at 2% (or US$ 50), and you spend US$ 100 on insurance as well as US$ 5 per package you send to each customer. You are also charged a US$ 2 payment processing fee per unit.

Your net costs so far can be simplified as:-

  • Product cost: US $10 per item
  • Shipping costs: US$ 500 for the shipment of 250 units or US$ 2 per unit
  • Customs fees: 2%, which is a total of US$ 50 or US$ 0.20 per unit
  • Risk coverage costs: US$ 5 + US$ 100 for 250 units, which is a total of US $5.40 per item
  • Overhead charges: US$ 2 per unit

To get the landing cost of the product/unit, add the fees of all the components of the entire order-

US$ 10 + US$ 2 + US$ 0.20 + US$ 5.40 + US$ 2 = US$ 19.60

Your final landed cost per unit is US$ 19.60.

If your product has filled only a part of the shipment and is grouped with other products, there are different ways of calculating the cost per unit. The most straightforward approach involves splitting the collective shipping cost to each unit included within the purchase order. You can also divide the cost of shipping per unique product in the shipment. This is achieved by splitting the percentage of weight or the percentage of space the product contributes to the delivery.

If you are importing into the US, you can use our import duty calculator or read more about the import license requirements in usa.

How to Reduce the Landed Cost?

These are the ways in which the landed cost can be reduced:-

  • Connect with new suppliers: Look for local or in-country suppliers for raw materials or your production needs.

  • Negotiate rates with carriers: Carriers often provide discounts on volume and other aspects. You can negotiate profitable rates or find a way of securing lower rates.

  • Optimizing warehouse staff and space: This can make the management of process inventory easy and also helps reduce the overhead charges included in the landed cost.

  • Look for new locations: Shifting the storage facility closer to the port or other entry points can bring down the landed cost.

  • Optimize inventory: The landed cost includes the COGS and the cost for inventory damaged, spoiled, etc., in transit. Better management of your inventory can help avoid spoilage and loss.

Depending on your supply chain personnel and other partners, you may use automation to achieve greater accuracy and reduce labor.

Difference between Free on board (FOB) and Landed Cost

Although both these costs are closely associated with international shipping, they are different in a few ways.

Freight on Board (FOB) refers to the price the retailer pays to a supplier at the factory to acquire the products. It includes costs of export packaging, fumigation, documentation, packing the container, and delivery to the shipper. It does not include the shipping and import fees.

The landed cost is the total cost of acquiring and shipping a product. It is the total price paid by a retailer till they receive the goods. The common charges involved are shipping costs, customs fees, insurance, and overheads.

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