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What Does Landed Cost Mean?

The sum of its bottom line affecting cost, landed costs refer to all of the expenses that come with a shipped, or landed product. These costs include shipping, handling, packaging, and tax/duty fees. Because of import and export taxes, knowing your landed cost is important to both optimize your price point for your end customer, and keep your cost of goods low when producing your product.

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.

Why Do eCommerce Businesses Need To Calculate Landed Costs?

Due to the worldwide nature of the internet, eCommerce businesses need to know their landing cost to make sure they don’t end up out of business by not pricing appropriately for all territories they service. Without looking at your landed cost, a loss might seem like a profit until you start looking at the books more closely. Knowing what your price to make something is, is key to pricing it, but knowing the true price of how much it costs to get to your customer is equally important. These two components will help you better source materials and work with distributors.

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 3 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

There are many things that can affect your landed cost, and unfortunately, 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, fees will generally end up as percentages.

Insurance

Insurance protects your products when no one is looking. The cost of insurance can vary wildly depending on an item’s value.

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, there are rules and regulations you have to deal with importing and exporting goods. Check out Trade.gov to figure out what duties or tariffs you’ll need to pay.

Exchange Rates

An ever-present moving target, a business should always keep the exchange rates in mind, especially if they source materials from overseas. 

Handling and Payment Processing Fees

Though generally nominal, processing fees do 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.

Free On Board

Free on Board 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 US 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, early or late arrivals, and more.

How To Calculate Landed Costs

The formula to achieve your landed price is as follows:

Total landed cost = Product + Shipping per Item + Duties  + Insurance + Processing Fee = Unit Price

Free On Board vs Landed Costs

Where landed cost encapsulates all of the shipping expenses, FOB is the price retailers and distributors pay a vendor for their goods. The FOB includes packaging, informational materials, and delivery to the shipper.

Land on the Perfect Price

Now that you know how to calculate you’re landed cost, it’s time to triple-check your pricing strategies. After that, see if we can help you optimize your supply chain, or reduce your shipping costs because every dollar counts.