Landed Cost: What it is and How to Calculate it for Your Business
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Want to know the true cost of your product from factory to shelf? Landed cost is the answer. Understanding landed cost is important because it’s more than just the purchase price; it’s shipping, taxes, duties, and insurance that affect your pricing and profit margin decisions.
Whether you’re an experienced eCommerce business owner or new to international trade, this guide will break down what’s in landed cost and how to calculate it so that you can get better cost management and pricing strategies.
Quick Facts
- Landed cost is the total cost of a product from origin to destination, including manufacturing, shipping, customs duties, taxes, insurance and other direct costs, but not indirect costs like office supplies.
- Accurate calculation of landed cost is key to pricing strategy, profit margins and supply chain efficiency, with techniques like technology, distribution optimisation and risk management plans to minimise these costs.
- Technology, especially inventory management software and automation, is a key to calculating landed cost accurately and efficiently, to inform better decisions and cost savings across the supply chain.
What is Landed Cost: The Whole Story
Landed cost is the total cost of a product from source to final delivery. This includes not only the costs of production or purchase but also:
- Transportation costs
- Taxation
- Customs duties
- Insurance
So when you understand landed cost you get the full picture of what it costs to get a product into consumers’ hands by including all costs along the way from producer to end user.
Calculating landed cost is important in business because it’s key to pricing products, analysing profit margins and making strategic decisions – especially when landed cost is important and in international trade. Manually calculating landed cost can be time-consuming and prone to errors, particularly when dealing with multiple products and various associated costs.
Using software can streamline this process and enhance accounting accuracy.
What’s in Landed Cost: Shipping Costs
The total landed cost includes:
- Costs during manufacturing
- Shipping fees
- Taxes and duties
- Insurance during shipping
- Overhead costs
- Payment processing fees
You need to understand each of these to get the final landed cost.
Add to that customs-related costs are part of the landed cost. This includes:
- Duties and tariffs
- Value added tax (VAT)
- Charges due to customs regulations
Businesses include insurance in this calculation as a buffer against risks like damage or loss while goods are in transit. When dealing with international suppliers, currency conversion is also a factor to consider in the overall landed cost which must be included in these calculations.
Direct vs Indirect Costs
Landed cost calculation is focused on the direct costs which are costs directly related to the product. These are:
- Unit cost
- Shipping costs
- Customs duties
- Insurance coverage
- Processing fees
Other costs not related to procurement and delivery like office supplies or transportation for operational purposes are excluded from this calculation. However, these additional costs should be considered when looking at the company’s overall expenses.
You need to account for each direct cost to get the total landed cost – a key input to pricing strategy and profit margins.
Why Calculate Landed Cost
Calculating landed cost is a business discipline. It reveals hidden costs like customs duties, storage fees and insurance costs and helps with better budgeting and forecasting.
Understanding landed cost helps businesses make informed decisions, set correct pricing and manage finances to be profitable and grow. To do that you need to calculate landed cost accurately.
Plus an accurate landed cost calculation is key to supply chain efficiency and profitability optimisation. It includes all costs from production to delivery and reveals areas for cost reduction and cash flow improvement.
Pricing Strategy
Landed cost is part of the pricing strategy as it’s where you preserve big profit margins and account for all costs of a product. Companies must apply the right markups on landed cost to get the correct earnings and return on investment.
To keep pricing strategies accurate, businesses need to update their landed cost calculation regularly. These updates should consider changing exchange rates and market dynamics so the costing reflects real time financial situation.
Supply Chain Efficiency
Landed cost gives you a view of your supply chain, it gives you insights to improve its performance and reduce overall cost. By breaking down landed cost you can:
- Identify inefficiencies in your supply chain
- Highlight opportunities
- Reduce overall costs
- Get big cost savings
Once you understand landed cost, you can:
- Negotiate better with suppliers and shipping agents to increase supply chain productivity
- Refine your logistical network by looking at different transportation options
- Use free trade agreements to reduce transit costs
- Have better visibility and clarity on supply chain activities
- Catch emerging issues early to mitigate costs and improve service to customers.
How to Calculate Landed Cost
To calculate landing cost, you need to start by gathering all the necessary information. This means understanding payment terms, transit time, production lead time, shipping or freight costs and any applicable charges.
Components of landed cost are transit costs like shipping fees, duties and customs taxes and additional costs for higher landed cost may include insurance premiums and compliance and quality assurance costs. When insuring valuable shipments, the cost of shipping insurance should be included in the total expenses involved in delivering goods to customers.
Landed cost calculation is the sum of these components.
- Production costs
- Tariffs
- Taxation
- Import duties
- Customs levies
- Risks
- Indirect costs
Missing any of these in your landed cost calculation can impact profit margins – more so when dealing with high volume of products.
Simple formula:
Data Gathering
When calculating the total cost of imported goods you need to consider many factors. These factors are:
- International shipping and logistics costs
- Port charges
- Tariffs
- Customs clearance fees
- Duties and taxes on import and export
- Local delivery costs
You also need to include extra costs like insurance costs, demurrage fees (charged when containers stay in port beyond the allowed time frame) and early or late charges from the port.
For customs fees and duties you can use resources like trade.gov or FedEx’s duty calculator. However, engaging with a customs broker will give you the actual rates for duties.
When considering risk costs in your landed cost analysis you need to mitigate your risk. This means having adequate insurance coverage, compliance checks and quality assurance protocols.
Landed Cost Equation
The landed cost formula has many components.
- Product price per unit
- Freight or transportation costs
- Customs clearance charges
- Risks
- Overheads
In landed cost calculation, you need to include customs costs which include tariffs, taxes and duties imposed by the importing country.
Risk factors in this formula cover all costs to protect the investment. This can be insurance premiums, compliance costs and quality assurance costs. Overheads in landed cost include sundry costs like currency conversion, payment processing fees for payments and related bank fees.
Example
Let’s examine a real-world scenario. Imagine you are importing 100 units of an item from Shanghai to Los Angeles, the following steps must be taken:
- Set up international transport and comply with import regulations.
- Set up international transport and comply with import regulations.
- Customs clearance and logistics planning.
- The product price per unit is $50 and freight is $1000.
- Customs duty is 5% of the product price.
- So landed cost per unit is $55.
Manage Let’s take a real life scenario. You are importing 100 units from Shanghai to Los Angeles. Here are the steps:
Let’s say your shipment gets delayed at customs for 3 days and you incur additional costs of $300 ($100 per unit per day). This will increase the landed cost per unit from $55 to $58 – how unexpected costs can impact the landed cost. Accurate calculation of these costs is key. Missing any of these will mislead you due to insufficient data analysis that directly impacts your profit margins.
How to Reduce Landed Cost
Reducing landed cost is key to increasing your company’s profitability. Here are ways to calculate landed cost and reduce costs:
- Negotiate better rates with carriers
- Work with 3PL providers
- Take advantage of bulk shipping
- Consolidate shipments to full container load
Refined distribution can reduce landed cost and increase product margins. Partnering with suppliers to find cost savings and risk management plans will help companies reduce their overall landed cost.
Simplify Distribution
Optimising distribution can also save on shipping costs. By setting minimum delivery requirements you can reduce the frequency of shipments and related costs, bulk orders are more economical than several small shipments. Reducing packaging or dunnage by shippers can save around 3% per load which will contribute to the overall landed cost reduction.
By cross-docking, you can reduce handling fees and costs and speed up shipping by transferring directly from incoming deliveries to outbound transportation without storage. Working with retailers to adjust pricing agreements or create incentives for bigger stock purchases can balance out freight costs and decrease landed cost.
Supplier Performance
Supplier performance can reduce total landed cost by a lot. By negotiating volume discounts or reviewing contracts with suppliers, companies can save a lot in procurement. Building long-term relationships with these suppliers will give better terms and understand each other’s capabilities which will optimise landed cost.
Involve suppliers in product development to find ways to save on production or transportation costs. Conduct regular supplier assessments to find opportunities for improvement and to encourage suppliers to maintain high quality.
Risk Management Plans
You must have risk management plans in place to address the risks in the supply chain which includes preparing for the risks that may occur during procurement and transportation. Having a supplier code of conduct and regular supply chain audits will help set the standard and find opportunities to improve risk management.
Having an emergency fund based on data analytics is key to handling unexpected events. Scenario planning can give you valuable insights on how to handle emergencies without impacting landed cost.
Technology for Landed Cost Calculation
In this modern era, technology can greatly simplify the process of calculating and tracking landed cost. Spreadsheets, custom-built applications or enterprise resource planning (ERP) systems are used to calculate these costs.
Deploying inventory management software is key to reducing administrative work and accuracy in calculating landed cost. Automation saves time, reduces errors and improves the decision-making process so it’s now a must-have in measuring these costs.
Business Intelligence platforms give you data analysis to help you make informed decisions on supplier performance and find opportunities to cut costs and manage risk in the supply chain better.
Technology that gives real time visibility to the supply chain—for example through a supplier portal—can detect risks early on and act proactively to avoid unnecessary expenses which contributes a lot to the overall landed cost.
Inventory Management Software
An automated inventory management system simplifies the process of manual landed cost calculation, speeds it up and reduces errors that happen with manual calculation. These tools will give you total shipping cost analysis which is important for companies to set the right product price to maximise profit.
This software gives you:
- Real time inventory visibility across multiple locations
- Exact total landed cost from origin to destination
- Help to maintain lean operation by reducing waste and associated cost
Implementing digital inventory management will improve operational efficiency and reduce cost.
Automation Benefits
Automating landed cost calculation will give you:
- Less labor required
- Less error margin even with multiple products
- Faster overall calculation time
- Simplify the complexity of landed cost calculation
- Price based on up-to-date and exact data
- More accurate data is important when you have variable costs.
When you move to an automated system for these costs, you can:
- Avoid losses to your profit by capturing all import costs
- Record estimated costs first and then adjust when actual figures are received to get more accurate
- Use advanced analytical tools designed for automation to fine-tune inventory management and find cost-reduction opportunities
- Back multiple costing methods including FIFO (First-In, First-Out), LIFO (Last-In, First-Out) and weighted average to value your inventory accurately.
Conclusion
Landed cost calculation is important for any business as it covers all the expenses from production to delivery. By minimising these costs and using technology wisely, businesses can improve their profitability and growth.
In summary, landed cost calculation is more than just numbers. It’s a tool to guide business decisions, pricing strategy and supply chain performance. Businesses that manage their landed cost well will gain more profit margin, reduce risk and stay ahead in the market.
FAQs
Why Landed Cost is Important to Business?
Landed cost itemises all the expenses involved in moving a product from the supply chain to the end destination. Global trade requires you to factor in the landed cost because of the high cost of international shipping, customs duty and currency conversion.
What is the difference between landed cost and standard cost?
Landed cost is the total cost of a product including the freight cost and other additional expenses which standard cost does not. This is the full amount spent when a product reaches its destination.
You need to consider the landed cost to price accurately and calculate the profit of items precisely.
What is the difference between FOB and landed cost?
FOB or Free on Board means the cost charged to a retailer for the goods which does not include transportation and import charges. Landed cost is the total cost of obtaining and moving a product to the destination including harbor charges and all other related costs.
By understanding this you can manage and control the cost of shipping and importing for your business.
What is landed cost in Australia?
In Australia, landed cost means the total cost of a product or shipment to be delivered to your door. This includes transport costs, customs duty, taxes, tariffs and insurance premiums.
For businesses to get a true picture of their investment and earnings, you need to calculate the landed cost.
Why calculate landed cost?
Calculating landed cost is important as it allows businesses to set accurate pricing, maintain good profit margin and make informed business decisions. It covers all the related costs.
How to calculate landed cost?
Add up the product’s unit cost plus shipping or freight cost, customs fee, risk factor and other overheads and expenses.
What is the other name for landed cost?
The cost of a product’s origin and arrival in the country is called landed price which includes all duty rates, freight charges and other extra fees. It’s also called the Total Cost of Landing (TLC) and total Delivered cost.
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