Landed Costs: Formula and Facts You Should KnowTime to read: 5 minutes
The business world has seen a tremendous transformation in the past two years. Shopping experiences, formerly local, have quickly become global, thanks to the internet. Back then, your options were limited to what your local businesses carried. Today, you can access online marketplaces anywhere and buy almost anything.
The cost of freight and duty on goods acquired abroad can be pretty high for businesses involved in importing. Your accounting department has to know all business expenses related to each product you offer from packaging to landed costs. This is to ensure a fully realized product cost to preserve profit margins.
Businesses can quickly establish connections with foreign suppliers to buy materials and supplies. A landed cost becomes significant when individuals or organizations conduct these foreign transactions. The landed cost is the price of the item plus any associated shipping fees for getting it from vendor to buyer. Customs fees, taxes, exchange rates, packing materials, insurance, and transportation expenses are all included in the shipping prices.
The landed cost is crucial for businesses, especially those with smaller operations. The earlier you can plan to pay for your foreign shipping costs and turn a profit even with competitive rates, the better. The total landed cost is the least expensive charge to sell a product you’re importing from another country (i.e., Chinese products sold in the US). You won’t make any money if you sell at this price. Price your imported item higher than what it cost to land if you want to make a profit.
Knowing your overall landing cost will provide you with an understanding of your financial performance. You’ll be able to determine how to reduce expenses by seeing what things cost. You also better comprehend your products and the trade-offs involved with optimizing their supply chain.
What Makes Up Landed Costs
You may pay several fees when shipping is included in the landed costs. While you can cut back on some of these expenses, you may have no control over others. The most typical ones are as follows. It’s crucial to remember that not all listed costs apply to your company or to every foreign cargo you send or receive.
1. Shipping Costs
This is the actual cost of moving a product from one place to another, whether by land, sea, or air. It represents the majority of landed costs. You must know the price per unit associated with delivering an item to a customer’s door. Storage of inventory close to your end consumer and negotiating better carrier rates can reduce shipping costs. Shipping zones, box dimensions, and delivery speed also affect shipping costs.
2. Insurance and Compliance Costs
Shipping insurance is an optional service frequently employed for expensive packages. The landed price must account for the additional cost you pay to insure the contents.
If a company’s goods are stolen, damaged, or lost while being transported to their destinations, it is protected through insurance. The type and value of the shipping products affect the insurance costs.
3. Foreign Customs and Import Duties
Each country has various import license requirements as well as customs-related taxes, fees, and regulations. Additionally, value-added tax (VAT) charges can change based on the kind of good or service.
Because foreign shipments are subject to higher costs than domestic ones, landed costs are closely associated with these shipments. Customs fees that vary by country and even by product can significantly affect merchants’ landing cost of imported goods.
While these expenses are unavoidable, you can reduce them by using overseas fulfillment centers to ship to domestic end customers.
4. Handling and Payment Processing Fees
Sometimes shipments come with extra handling expenses, including surcharges. Companies must consider it when calculating the landing cost.
Special handling surcharges for packaging and storing orders, including processing fees for credit and debit card payments, may apply to shipments.
Calculating for Landed Costs
A company can establish its total landing cost once it has determined and gathered each shipping-related cost (not every fee listed above will be applicable). Despite having a straightforward method, figuring out the landed cost can take some time. This process can get tricky when dealing with multiple products and manual calculations. The effects of a calculation error can also be significant. A mistake that underestimates the landing cost can severely affect your profit margins. It can result in higher prices that drive customers to rival businesses.
The simplest way to determine the landed cost for an order is as follows:
Manufacturing cost + shipping cost + shipment insurance + import taxes + other fees
To better understand how to use this calculation, let’s examine how landed cost works with an example. Suppose we have a U.S. retailer that sells men’s wool socks. The business owner purchased 1,000 wool socks from a supplier in London for $5 per unit (totaling $5,000). The import tariff is 2%, while the freight cost for the entire shipment is $1,750. Shipping insurance costs $150 for the whole order plus $3 per package shipped (assuming each package has one unit). Transactions are in U.S. dollars and include a payment processing fee of $1.5 per unit.
The variables to calculate landed cost are as follows:
- Product: $5 per unit
- Shipping fee: $1.75 per unit
- Customs: $0.1 per unit (2% x $5)
- Insurance: $3.15 per unit [$150 insurance fee + ($3 per package shipped x 1,000) /1,000]
- Payment processing fee: $1.5 per unit
Your total landed cost will come out to $5 + $1.75 + $0.1 + $3.15 + $1.5 = $11.5
For this seller of men’s wool socks to break even, they would have to sell their products at $11.5. They would have to increase the price above the landed cost to make a profit.
It’s important to consider every single factor that goes into the computation of landed costs. Even if you find a supplier that sells items for cheaper, the shipping fees from their location may be more expensive. This offsets any savings from finding a cheaper supplier, giving you a larger total landed cost.
Managing Landed Costs
With every product you sell, you must factor in landed cost estimates. The cost of the goods is far more than the wholesale price, particularly if you have to pay additional taxes due to lengthy customs clearing procedures. Fees are another issue for product exporters; they typically factor such costs into their price decisions.
Your first response could increase your rates to boost your margins if your landed costs are rising faster than your projections. However, a careful examination of your landed costs might enable you to boost earnings without increasing prices for your clients.
Taxes and other expenses included in your landing cost are out of your control. But here are some strategies for controlling costs:
Evaluate Your Supply Chain Partners
Similar to how customers like to compare prices among different brands, you, too, should shop around between carriers and logistics providers. Shipping is almost always the biggest contributor to landed costs.
One of the most frequent reasons for high landing expenses is unexpected additional fees. Compare the prices for 3PLs, distribution centers, and shippers so you’ll get the best value. If your connections with your supply chain partners are solid and you are satisfied with your present partners, you can try to negotiate better terms.
Optimize Warehouse Operations
A disorganized warehouse might result in costly supply chain issues. Perhaps you have too much safety stock on hand, or your team is having trouble quickly locating needed items. Utilize warehouse management software to gain real-time insights and customized reports. This way, you can assess your stock instead of depending on cumbersome spreadsheets. It’ll also help you uncover weak points before they harm your bottom line.
Automate Your Calculations
Manually calculating landed costs isn’t necessarily difficult. But it is time-consuming, and the process becomes more laborious and error-prone as you move more goods. Fee fluctuations may also impact profitability. Your data will be more accurate thanks to automation, which will speed up computations and enhance crucial operational judgment.
Whether you’re shipping across state borders or throughout the world, you must know the exact cost of the products you ship. The cost of shipping is high. While it is a small portion of a much broader equation, it affects your staff, clients, and bottom line. You’ll be able to budget more precisely than ever if you keep a careful eye on landed costs.
ZhenHub makes it simple to determine the real cost of your shipments so you can focus on expanding your business rather than spending time analyzing figures. Track your shipments with our cost-efficient fulfillment solutions. Sign up now and get access to our easy-to-use logistics software platform.