Landed costs are all of the expenses associated with a shipped product, such as shipping fees, handling charges, packaging costs, taxes and duties. These can have an impact on your bottom line so it is important to understand landed cost in order to optimize both your customer’s price point and keep production costs low
In this article, we’ll go over how landed costs work along with how your business can better understand its own landing costs.
How Does Landed Cost Work?
Whatever it takes to get your product to its end customer is its landed cost. This includes your cost of goods to make the product, your labor cost, shipping, handling and processing fees. Once calculated, a company determines the viability of a product.
By calculating landed costs accurately, companies can determine whether their products are profitable for them in the long term.
Why Do E-Commerce Businesses Need to Calculate Landed Costs?
In today’s world, e-commerce businesses need to consider the cost of their products across multiple territories to remain competitive. The global nature of the internet means that customers from every corner of the world can access your store. You need to be aware of your landing cost for each territory that you serve.
Without understanding your landing cost, you risk pricing your products too low and not making a profit. Knowing your landed cost also helps you to be more strategic in your sourcing and distribution decisions.
For instance, you may want to source materials from a particular supplier to get a cheaper price. Before you commit to this supplier, you should consider their shipping costs and other associated fees. Once you have calculated your true cost of the product, you can make an informed decision on whether this supplier is a good fit for your business.
By taking the time to understand your landing cost, you can make sure that your business is profitable in all territories that you serve.
Example of Landed Costs
An example of a landed cost could be as follows:
- You buy materials for $5 per order.
- You get an order for three of your end product.
- Your shipping cost is $5.
- Your customs, tariffs and processing fees cost $2.
- Your landed cost is $22.
Factors That Impact the Total Landed Cost
Many things can affect your landed cost, and almost all of them can shift. Though these things can shift, a lot of them become a little more static. Things like insurance and exchange rates will fluctuate, and fees will generally end up as percentages.
Customs and Import Duties
Duties are an unforeseen cost a lot of businesses don’t take into account, but if you’re doing business internationally, you have to deal with rules and regulations for importing and exporting goods. Check out Trade.gov to figure out what duties or tariffs you’ll need to pay.
Exchange Rates
Exchange rates can have a significant effect on your landed cost. They fluctuate on a daily basis, making it difficult to plan for an accurate landed cost. If you are importing goods from another country, you should be aware that the exchange rate between your currency and the currency of the country you are importing from could change significantly in a short period of time.
Handling and Payment Processing Fees
Though generally nominal, processing fees affect the bottom line and landed cost of your product. Most processors have similar pricing, somewhere in the realm of 1.5% to 3.5% of each transaction.
Demurrage Fees
Unless you’re running a large business at scale you’ve probably never heard of demurrage fees. Demurrage fees are incurred when shipping containers are just sitting in a port beyond the allotted free time. These fees will continue to increase until your shipping container is removed.
Shipping Costs
Shipping costs can vary depending on the size and weight of the goods being shipped, the destination and the method of shipping. If you are importing a large shipment, you may be able to negotiate a lower rate with your shipping company.
Free on Board
Free on board (FOB) isn’t necessarily a cost, but it does dictate who is liable for damaged goods during transport, so once again, insurance is key.
Export License
Though 95% of things exported from the U.S. don’t need this,, knowing you’re export control classification number is key to making sure that you don’t find yourself in the 5%.
Port Charges
Port charges occur for a variety of reasons. Generally, these costs are incurred in the form of demurrage fees, but fees can also accrue for cancelations and early or late arrivals.
How to Calculate Landed Costs
The formula to achieve your landed price is:
Total landed cost = Product + Shipping per Item + Duties + Insurance + Processing Fee = Unit Price
Free on Board vs. Landed Costs
When you’re in the business of buying and selling products, the terms “landed cost” and “FOB” are important to understand. The landed cost encapsulates all of the shipping expenses associated with getting the goods from the vendor to their final destination, while FOB is the price retailers and distributors pay a vendor for their goods.
In some cases, retailers and distributors may choose to pass on the landed cost to the customer by adding a shipping charge to the FOB price. This is not always the case, and it’s ultimately to you to decide what works best for your business
Land on the Perfect Price
Now that you know how to calculate your landed cost, it’s time to triple-check your pricing strategies. This means taking a closer look at your cost structure and understanding exactly where your profits are coming from. This can help you identify areas where you can reduce costs or where you need to raise prices to ensure you remain profitable.
Once you have a better understanding of your pricing strategies, you can look at ways to optimize your supply chain. This can help you reduce costs and increase efficiency, which will ultimately make your products more competitive.
With a bit of work and a good understanding of your pricing strategies, you can make sure you’re charging the right amount for your products and not leaving money on the table. This will help you remain competitive and maximize your profits in the long run.
In the meantime, reach out to Print Bind Ship to learn about potential ways to save on shipping and e-commerce fulfillment.
FAQ
The landed cost is the total cost associated with bringing a product or service to market. It includes the cost of purchasing raw materials, manufacturing, shipping, marketing and other associated expenses.
Understanding landed cost is important for businesses as it can help them make informed decisions when pricing their products and services. It can also help them identify areas where they can make cost savings.
No, landed costs varies for different products or services. Factors such as shipping, taxes, duties and other associated expenses can all affect the landing cost.