The definition of landed cost, also called landed price, is the total cost of getting a product from the supplier to its destination. To determine this cost, you need to consider the cost of the products themselves, plus any other costs you directly incur to obtain the products. These costs can include everything from shipping to freight costs. They will also likely include other expenses, especially if you’re importing goods, such as costs associated with customs, duties, insurance, storage and taxes.
To calculate the landed cost, you’ll need to add up all of these extra fees and expenses. You can also calculate the landed cost per unit, which is the total cost for each individual unit, rather than for the entire shipment. You can define units in various ways, including by individual products, by weight or by volume. This number can tell you how much it costs you to ship each product or each portion of your shipment.
Why Is Landed Cost Analysis Important?
It’s crucial to conduct a landed cost analysis for all your shipments. It gives you a full picture of your costs and helps you make better-informed decisions. Calculating the landed cost is important because it provides you with a template on how to price your products.
Provides You More Accurate Information
There are obvious costs associated with shipments, such as the cost of the goods, but there may also be expenses that are less apparent, such as duties, insurance costs and quality control costs. Calculating the landed cost gives you a complete picture and helps you avoid unexpected expenses, making your reporting and budgeting more accurate.
Helps You Optimally Price Products
If you set your prices too high, you may see a decrease in sales. If you set them too low, your profits may not be as high as you’d like and you may even lose money. Without an accurate idea of how much it costs to ship each product, it’s much harder to price your products at the optimal level. Understanding landed cost is crucial for knowing how to price imported products. It also gives your sales team an idea of how much they can discount a product while still bringing in a profit.
Helps Reduce Expenses
When it comes to international shipping, the lowest-priced products are not always the best deal because several other factors go into the shipping process. Calculating landed costs requires you to look at all of your expenses related to shipping products. This may reveal opportunities for reducing your costs. Consider whether all of your current costs are worthwhile, whether more cost-effective shipping methods might exist or whether other shippers offer better prices. Analyzing your landed costs can also give you the information you need to negotiate better rates.
Supports Global Trade
About 87 percent of U.S. businesses believe international expansion is necessary for long-term growth. Working with foreign suppliers and selling your products to customers in other countries provides your business with more opportunities for growth. You can introduce your brand to new markets and potentially lower your costs. However, to take advantage of these possibilities, you need to know how much it will cost to expand your operations and partnerships to other countries. Landed cost analysis gives you the information you need to be confident that you can grow your business by expanding internationally.
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What Are The Components of Landed Cost?
Several components account for the total cost in your ecommerce business. Any factor or cost that contributes to the expense you incur to fulfill orders and get items to your buyers’ doorstep is a component. When calculating your landed cost there are generally, five factors that you should consider.
Product Cost
This is the cost of manufacturing or acquiring the product from manufacturers or suppliers. It accounts for the raw materials and other manufacturing components. You can reduce the product cost by streamlining your manufacturing processes, sourcing cheap raw material or obtaining supplies from manufacturers who sell the product at a favorable price, widening your profit margin.
Shipping
This includes the cost of transporting goods from suppliers to your fulfillment centers and then mailing packages to your customers. Handling fees, freight and transportation costs all make your shipping expenses. Depending on how you import and export your products, you may end up with varying shipping fees for inland, air or ocean freight. Shipping zones, delivery speed, and package weight are all important factors that determine your shipping costs when sending items to your customers. To remain profitable, you need to know how much per unit it costs to send packages to customers. You can reduce shipping costs by negotiating better carrier rates, or partnering with 3PL (third-party logistics) providers that has multiple facilities so that your inventory is stored closer to your end customers. This will help reduce shipping costs and carrier transit times.
Customs
Although hidden fees can happen in domestic shipping, the term has come to be associated mostly with international shipping because of customs duties. If you source products from foreign suppliers or sell to customers overseas, then you will face import duties and export fees. Duties, tariffs, brokerage fees, harbor fees, taxes, Value-added-tax(VAT), levies, currency conversion, crating and any other customs regulatory fees are all part of customs expenses. Most of the time, customs, taxes, and duties are inevitable. But you can avoid or reduce them by having your products located in different countries so that orders are shipped within the country they are ordered from. The best way to implement this strategy will be to work with a 3PL provider that has a network of fulfillment centers in different countries to help reduce costs.
Risk Coverage Costs
Risk coverage is the fourth component. It has everything to do with protecting your cargo while it’s in transit. It boils down to insurance expenses, and any other quality assurance and compliance fees. Though shipping insurance is optional, it is an important service for securing expensive shipments, and anytime you pay extra to secure your merchandise or packages, you should factor such fees into your bottom line. Using courier services that include insurance for valuable packages is an excellent way to mitigate insurance costs and reduce the cost.
Overhead Costs
Overhead include inventory carrying costs, staff wages/salaries, payment processing fees, exchange rates, and any other costs associated with everyday ecommerce business operations. Though some of these fees can easily be forgotten or ignored, keeping them in the back of your mind will help you determine whether you are doing a truly profitable business. Partnering with a 3PL to warehouse your inventory and fulfill orders on your behalf is a good way to keep overhead costs low.
How to Calculate Landed Costs
To calculate landed cost, add the cost of a product, shipping, customs, risk, and overhead expenses. That sum is the total landed cost.
Landed cost = product + shipping + customs + risk + overhead
Manually calculating landed cost can take up valuable time and carries added risk of inaccurate accounting, especially if you carry many products or have many types of costs to incorporate into the formula. There are many software applications available where you can automatically factor in freight rates, insurance, and other expenses to ensure quick, accurate accounting when fulfilling orders.
Let’s look at the landed cost formula in action. For the sake of this example, you run a business that sells widgets. Here are your expenses:
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
Landed cost = $4 + $1 + $.04 + $5 + $1.50 = $11.54
So, in order to make a profit, you’d need to mark up the widgets higher than $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.
Bottom Line
It is important to keep tabs on your total cost so that you don’t end up cutting into your profit margins. Landed cost helps with financial management for the entire supply chain and provides an accurate gross margin for each unit of stock. By incorporating landed cost into your financial calculations, you can generate more accurate reports to guide decision making for increased profitability.
There are many benefits to working with a 3PL, if you are seeking logistics support we’d love to hear from you. You can read DCL’s list of services to learn more, or check out the many companies we work with to ensure great logistics support. Please contact us to learn how we can help support your growing business.
Tags: International
