If you plan to ship your products internationally (via air or ocean freight), it’s important to make sure you understand the customs fees that will apply. International shipping is complex enough—no one wants surprise extra fees, especially if you are launch products into a new market.
It can be a big advantage for brands to get an accurate estimate of their total landed cost. Here are a few reasons:
- Don’t lose money on shipments.
- Easier to factor customs fees into your overall product cost for international customers.
- Eliminate surprise fees after you start shipping and selling.
Here are the major factors that affect total landed cost, some obvious ones, and some that are often overlooked.
International shipping can be confusing and overwhelming, here’s a glossary of common international shipping terms and their definitions.
What is Total Landed Cost?
Landed cost is the sum of all fees incurred when importing products internationally. It often refers to taxes, duties, and customs fees, but it includes more than that.
There are many reasons shippers need to have an accurate estimate of their total landed costs, but the most important is to accurately price their merchandise for consumers. If you underestimate your total landed costs, you’re likely to lose money on international shipments. When importing into a new market, it’s crucial to get an accurate estimate of all fees and costs so this doesn’t happen.
“It is really valuable to know what to charge your customer at checkout, and part of that is getting your landed cost estimate right. This helps relieve any surprise invoices 30 days later when you may realize that you shipped an unprofitable shipment.”
How to Calculate Total Landed Cost
To calculate landed cost, add the cost of a product, shipping, customs, risk, and overhead expenses. The sum is the total landed cost.
Landed cost = product + shipping + customs + risk + overhead
Manually calculating landed cost can be time consuming and error prone. The more products you ship, the more complex the formula becomes. There are many tools that can automate this for you, they may also have updated information to factor in freight rates, insurance, and other expenses to ensure quickly and accurately.
Here’s an example of how total landed cost should be calculated.
- Unit cost: $4/unit (500 total units)
- Shipment cost: $500, or $1/unit
- Customs: 2%, or $0.04/unit
- Risk: $5/unit
- Overhead: $1.50/unit
- Total Landed cost = $4 + $1 + $.04 + $5 + $1.50 = $11.54
Once this calculation is laid out you can easily see how much you need to mark up your products in order to make a profit. Here that markup is $11.54. to make a profit.
As you can see, overlooking just one factor could have a major impact on your bottom line, especially when you factor in adding more products over long periods of time.
Commonly Overlooked Factors That Affect Total Landed Cost
Some of the more important factors when getting an accurate estimate of your total landed cost may be more obvious than others. VAT, duties, and customs fees are the ones most shippers focus on, but it’s also important to get the right HTS Code, and factor in the many lingering additional fees that may be applied like brokerage fees and accessorial charges.
Here are ways to calculate these often forgotten or misunderstood factors to get a more accurate total landed cost estimate.
1. HTS Code
When shipping internationally one of the most important things to get correct is the HTS code. This is a code that distinguishes your products and materials according to the international standardized system called the Harmonized System classification.
It seems simple, right? Just assign your products the code that matches. It’s more complex than that because the code assignment is somewhat subjective. It depends on what the product is, how it’s used, and where it was manufactured.
To get your HTS code correct, you have to know literally everything about your product and the materials that are included—where they come from, where their manufactured, what they are made of, what your product does and does not do, plus any other detailed specifications that differentiate your goods.
If you’re unsure how to assign your products, always consult with an international shipping expert for help.
2. Calculating VAT
Your VAT rate is straightforward to figure out because it is fairly set. Look for the possibility of having a reduced VAT rate. This can apply to specific items like medicines and books. It will depend on the country you’re importing to.
If you don’t have any reductions, you can just multiply your shipments by the VAT rate and you have your estimate.
For example, Germany’s VAT rate is 19%, if you’re shipping direct-to-consumer to Germany, the VAT multiply your shipments by 19% and you have an estimate that will be close to accurate.
3. Understand the Market You’re In
Every country has its own requirements. Understanding how customs fees are calculated is key to getting an accurate landed cost estimate.
For example, the EU is a “cost insurance from freight” market, which is often shortened to CIF. This means that VAT applies not only to the cost of the goods, but to the transportation cost and insurance that is also collected on the duties.
While VAT is an easy number to calculate, a CIF market makes getting an accurate landed cost estimate a bit more complex.
Let’s take the EU for example. If your product shipment is over €150 (which is the duty threshold) then you’ll pay duties upon import. If you’re shipping to France, that’s a VAT rate of 20%. To get an accurate estimate, you’ll need to apply that across all fees, the shipping rate, the cost of the goods, insurance duties, and more.
4. Broker Fees and Accessorial Charges
Many brands look at the transportation costs and shipping rates but stop there. This is especially true if they are focused on getting products shipped within a certain timeframe, looking at express carrier services, for example. There are many more fees that go into total landed costs, not only shipping related ones.
Here is a short (not comprehensive) list of fees that shippers tend to forget to consider when getting a total landed cost estimate.
- Brokerage fees — The charges from an agency or agent for the act of managing a brand’s international shipping transactions. Even if you see “routine brokerage is included” that may not add up to all the charges you’ll see on a final invoice.
- Accessorial charges — A catch-all term of all service fees that may be added to shipping and logistics services. These are usually noted as separate from any charges that relate to shipping, receiving, or transportation.
- Duty and tax boarding surcharges — Any extra fees that may be layered on top of duties and taxes. Often surcharges are set for a specific season, or for shipments with any anomalies (larger or additional handling required).
- Bond fee — A customs bond is a type of contract for imports valued over a certain threshold. The bond fee acts as a financial guarantee that links the importer, the Customs and Border Patrol (or a customs government entity) and the bond issuer together in a contract that all duties and taxes will be paid.
- Disbursement fee — The additional cost added for the work of advancing duties and taxes on your behalf. For example, UPS or FedEx pays duties and taxes on your behalf, and because of that they charge you a small extra fee (typically it’s around 2.5% with a minimum of ~€15).
All these fees can affect total landed cost, no matter what shipping service a brand chooses to use. These fees also vary widely in actual cost.
Even if these accessorial fees are each a small amount, they will add up quickly when multiplying them by each shipment or as a small percentage of your overall shipping cost. Knowing what the accessorial costs are for your product’s clearance will be a benefit to you not having any surprise fees on your first invoice.
If you are looking for international shipping support, DCL Logistics partners with the best experts in the industry. Our fulfillment software syncs with our international shipping partners, so you can launch your products in new markets, but manage your business from one single place. Reach out for a quote or hear more about how we can support your growing brand.