Businesses that want to be profitable must first carefully account for every expense in orderto price their products and services properly. However, some expenses are more nuanced thanthey appear. One example is product shipping, where transportation is just part of thepicture, especially when importing and exporting is involved. These nuanced expenses,collectively known as landed cost, can chip away at a business's profitability if notproperly recognized.
What Is Landed Cost?
Landed cost is the sum of all expenses associated with shipping goods to their finaldestinations, whether that means onto shelves in a warehouse or store or straight to acustomer's doorstep. The concept may sound like a case of simple addition — andsometimes it is that straightforward — but often there are many “extras”to accountfor and analyze, especially when working with companies in other countries. Cost fortransportation aside, these extras include packaging expenses, taxes, insurance fees,customs duties, currency conversion, crating, storage and any other charges incurred alongthe product's journey. Whether you're a supplier or a buyer, understanding landedcost has important implications for purchasing, pricing and profitability.
Key Takeaways
- Landed cost is the total cost to ship a product to its final destination — thoughit is not part of COGS. It includes transportation, taxes, payment processing and otherpossible fees.
- Understanding and tracking landed cost becomes more critical when doing businessinternationally, which involves customs-related costs, exchange rates and other fees.
- When shopping around for products, keep in mind that higher landed costs can diminishany savings gained from a low per-unit price.
Landed Cost Explained
Landed cost, also known as total landed cost, represents all expenses involved in a product's delivery toits final destination, whether by land, sea or air. Landed cost includes the per-unit costof a product, freight, taxes, import and export duties, insurance, payment processing andhandling fees, exchange rates and storage fees. These costs will vary from one country toanother, or based on the time of year, how much is being shipped and other factors. Of note,landed cost reflects direct costs only, and it is not a component of cost of goods sold (COGS).
Why Is Landed Cost Important to Businesses?
Landed cost itemizes every fee involved in transporting a product through the supply chain toits end destination. In the world of global trading, factoring for landed cost is especiallycrucial, given the many expenses embedded in the international shipping process, such ascustoms and currency conversion. Landed cost is important to businesses because it impacts:
Product pricing:
If a business doesn't account for landed cost, it may not charge enough for itsproducts to cover all shipping expenses.
Profitability:
Incorrect product pricing, in turn, can decrease profit margins because the businesswill have to "eat" those expenses.
Purchasing decisions:
From a buyer's perspective, it's important to understand landed cost whencomparing competitive offerings. For example, a product that costs less to purchaseper unit from overseas than domestically may seem like the better deal — thatis, until international freightfees, customs charges, cross-border taxes and insurance are tacked on. Suchcosts can take a sizable bite out of a business's budget.
Shipping decisions:
Monitoring landed cost over time can help a company identify opportunities to reduceshipping expenses. Perhaps choosing a different shipping company or different modeof transportation can lower expenses. Or maybe the time is ripe to renegotiate witha carrier on volume shipping deals and discounts.
8 Factors of Landed Cost
Landed cost can add up quickly, especially for businesses that import and/or export products.Landed cost incorporates various fees, not all of which may apply to every business orshipment.
Shipping/freight cost:
This is the price of physically transporting a product to its destination, whether byland, air or sea. It makes up the bulk of landed cost.
Insurance and compliance costs:
Insuring merchandise protects a business if its goods are stolen, damaged or lost enroute to their destinations. Insurance costs vary, depending on the type and valueof the goods being shipped.
Customs and import costs:
Each country has different custom-related fees, taxes, regulations and possiblelicensing requirements for importing goods. In addition, fees such as value-addedtax (VAT) can vary, depending on the type of product or service.
Handling and payment processing fees:
Shipments may be subject to special handling surcharges that cover the costs ofpacking and storing an order, as well as fees for processing credit and debit cardpayments.
Export license:
U.S. businesses that export goods typically don't need an export license to doso, though some additional costs may still be involved. Check the product'sExport Control Classification Number (ECCN) to determine requirements.
Demurrage fees:
Shipping lines charge a penalty, or demurrage, fee for full containers sitting insidea port or terminal for longer than the free time allotted.
Exchange rates:
Currency rates are fluid and should be monitored when planning long-range productpricing.
Port charges:
Port charges cover the use of a port's facilities. A shipment's early orlate arrival or its cancellation can affect charges.
How to Calculate Landed Cost
Once a business determines and collects individual shipping-related expenses — and notevery charge listed above will be applicable — it can calculate its total landed cost.Despite its simple formula, calculating landed cost is not necessarily a quick exercise,particularly when performed manually and many products are involved. In addition, theconsequences of a miscalculation can be sizable: An error that results in an underestimationof landed cost can negatively affect profit margins, while an error that results in anoverestimation can lead to higher pricing that sends customers running to competitors.
Landed cost formula:
The basic formula for landed cost adds together a product's unit cost and cost forshipping, customs, risk and overhead. It looks like this:
Landed cost = unit cost of product + shipping/freight + customs + risk + overhead
where:
- Unit cost is the price of each unit of product.
- Shipping/freight costs include crating, packaging and handling.
- Customs are determined by each country, whose agencies are responsiblefor collecting duties, tariffs, VAT, broker fees and harbor fees associated with goodscrossing into and out of the country.
- Risk fees cover insurance, compliance, quality control and safety stock, whichaims to prevent a company from running out of a product.
- Overhead costs cover special handling fees, including currencyconversion, bank charges, payment processing and surcharges.
Example with landed cost:
Let's examine how landed cost works with a hypothetical example of a U.S. retailer thatsells women's accessories. Penny Brown, owner of "Penny's Purses," haspurchased 500 handbags from a supplier in Canada at a price of $10 per unit (totaling$5,000). The import tariff is 2%, while the freight cost for the entire shipment is $1,000.Shipping insurance costs $200 for the full order, plus $5 per package shipped (assuming eachpackage has one unit). Transactions are in U.S. dollars and include a payment processing feeof $3 per unit.
The variables to calculate landed cost are:
- Product: $10 per unit
- Shipping fee: $5 per unit
- Customs: $0.20 per unit (2% x $10)
- Insurance: $5.40 per unit [$200 insurance fee + ($5 per package shippedx 500) / 500]
- Payment processing fee: $3 per unit
Therefore, the total landed cost per unit is $10 + $5 + $0.20 + $5.40 + $3 = $23.60. That sumis the amount Penny would have to charge for each handbag, or $23.60, to break even. To makea profit, she would need to charge more.
Let's add on. Could Penny lower her costs if she were to purchase the handbags fromIndia, where the handbag’s unit cost is $5? Yes, provided all other fees are the same.ButIndia is much farther away than Canada, and landed cost items have higher prices.
- Product: $5 per unit
- Shipping fee: $6 per unit
- Customs: $0.50 per unit (10% x $5)
- Insurance: $14.40 per unit [$1,200 insurance fee + ($12 per packageshipped x 500)] / 500]
- Payment processing fee: $6 per unit
The total landed cost per unit is $5 + $6 + $0.50 + $14.40 + $6 = $31.90.
This comparison illustrates why it's important to analyze all of the elements that gointo landed cost. Despite a 50% reduction in per-unit price, all other costs associated withshipping the handbags from India to the United States makes the purchase more expensive thanbuying them from Canada.
Tips for calculating landed cost:
As the saying goes (or some variation thereof), your output is only as good as your input.Consider these landed cost tips:
- Have a firm grasp of all expenses. In addition to shipping, landed-costline items may include taxes, customs, import and export taxes, storage fees andinsurance. Only with this detailed assessment can a business understand its totalshipping costs and then price its products accordingly to maximize profit.
- Investigate ways to lower your costs. Just as customers might compareyour products and prices against competitive offerings, so, too, should you requestquotes from different carriers and logistics providers to get the best shipping prices.Shipping will be your highest landed cost expense.
- Automate calculations. Manually calculating landed cost isn'tnecessarily difficult. But it is time-consuming — and the more products you ship,the more labor-intensive and error-prone the process becomes. Fees can fluctuate andimpact profitability, too. Automation will improve the accuracy of your data, speed upcalculations and improve key operational decision-making.
How to use NetSuite to calculate landed cost:
NetSuite Inventory Management helps businesses track and calculate their inventory-relatedexpenses, including landed cost. Several preferences in the software must be enabled,starting with the landed cost feature itself, after which landed cost–related expensescanbe designated, tracked and added to the value of the inventory item. This video demonstrateshow to set up andconfigure the software's landed cost feature.
Free Landed Cost Calculator
A landed cost calculator can help a business accurately estimate its landed cost —however, ERPs and advancedinventory management systems do this within the platform. Some calculators can alsocompare landed cost across different countries to help determine the least expensive option.
Get the free landed cost calculator
Use our free landed calculator to determine your product's landed cost. Thecalculator is prepopulated with the costs from the first "Penny'sPurses" example presented earlier. It also includes fields for costs thatweren't applicable in that example but may be required for calculating yourown landed cost.
View the calculator
Improve Your Landed Cost and Manage Inventory With NetSuite
Landed cost refers to all the fees incurred by a business to deliver a product to its finaldestination. Shipping may be an obvious cost — it certainly is the biggest — butlanded cost may also include harbor fees, storage costs, import and export taxes, insuranceand more. Working from a product's weight, value or quantity, NetSuiteInventory Management can automatically calculate and track fees included inlanded cost, which then need to be baked into product pricing so a business can make aprofit. The software also provides real-time visibility of inventory across multiplelocations, optimizes inventory levels based on demand so as to avoid overordering orstockouts, and streamlines core inventory processes.
Conclusion
Seemingly small omissions of expenses can quickly add up and whittle away a company'srevenue and overall profitability. That's why the meticulous tracking of landed cost— every single expense associated with shipping goods to their final destinations— is so important. Its accurate calculation can help business owners determine thebest prices for their products so as not to charge too little and lose money, or charge toomuch and lose to the competition.
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Landing Cost FAQs
Why is landed cost hard to calculate?
It's not so much that calculating landed cost is difficult — the main challenge iscollecting all of the right data for an accurate calculation, especially when differentcountries are involved. Landed cost includes the per-unit cost of a product, plus amountsfor freight, import and export duties, various taxes, insurance, processing fees, exchangerates and storage fees.
Why should ecommerce businesses calculate landed cost?
Shipping is an inherent part of ecommerce. Ecommerce businesses can quickly lose money ifthey don't factor in the variety of costs associated with shipping — especiallywhen they import and/or export overseas. Landed cost includes the per-unit cost of aproduct, freight, taxes, import and export duties, insurance, payment processing andhandling fees, exchange rates and storage fees. These costs will vary from one country toanother or be based on the time of year, how much is being shipped and other factors.
How do you calculate landing cost?
Once a business determines and collects individual shipping-related expenses, it cancalculate its total landed cost. The basic formula for landed cost is: Landedcost = unit cost of product + shipping/freight + customs + risk +overhead.
How does landed cost impact product pricing?
By calculating landed cost, a business can determine the true cost of a product, not just thematerial good itself, and then price its offering accordingly.
What is the difference between FOB and landed cost?
FOB, which stands for freight on board or free on board, is the price the buyer pays toacquire products. It doesn't include shipping or import fees. Landed cost is the sum ofall expenses associated with shipping goods to their final destinations.
