Landed cost: The hidden factor in your pricing formula

When it comes to pricing strategy, there are dozens of factors to consider, like manufacturing costs, labor, and markups. In addition, landed cost should be on your list. 

Landed costs — which include shipping and duties — can get expensive, especially if you frequently buy supplies from overseas. Without including them in your pricing calculations, you risk underpricing your products and losing profit on each sale. 

Here’s how landed cost impacts your bottom line, plus strategies to calculate it accurately.

What is landed cost?

Landed cost is the total cost of bringing a product from a supplier to your warehouse. It includes the product’s purchase price, shipping costs, and any other fees. 

The key to approaching landed cost correctly is including all factors — not just the original purchase price. For example, if you buy 1,000 units of a product at $1 each, you may also pay $20 in taxes and $30 for shipping. It would be inaccurate to say you paid $1,000 total. You paid $1,050, so each unit actually costs you $1.05. 

When you sell this product to customers, you have to mark it up with the entire landed cost in mind. This ensures you earn back your projected profits and bring in the necessary revenue to keep business moving.

Key factors of landed costs

To accurately add up an item’s landed cost, consider the following factors. Remember that not all of these may apply.

1. Cost of goods sold (COGS): This is the total cost of producing and selling each unit. 
2. Transportation fees: Suppliers typically charge you to ship the product from the supplier to your warehouse.
3. Customs duties: If you order items from another country, you may have to pay import duties from customs authorities.
4. Import taxes and VAT: You may also have to pay extra taxes on imported goods, including value-added tax.
5. Insurance costs: Some businesses insure their products against loss or damage during shipping.
6. Inspection fees: In some cases, you must pay for the inspection of goods at customs and other checkpoints.
7. Warehousing and storage fees: You also have to consider the costs of storing your products until sale, also known as holding costs.
8. Handling fees: There are various fees related to the handling of goods during transport and storage.
9. Currency exchange rates: Consider currency conversion costs when purchasing from foreign suppliers.

The importance of landed cost for eCommerce

Here are key reasons why eCommerce businesses should understand and accurately calculate their landed cost:

1. Profitability: By knowing exactly what it costs to receive products, you avoid underpricing. For example, if your landed cost per unit is $24, use that as a starting point to calculate your retail price and achieve your desired profit margin. 
2. Competitive pricing: When you know a product’s landed cost, you have all the information you need to set competitive prices while still maintaining healthy profits. This lets you strategically offer discounts and promotions and respond to market changes without eroding your margins. 
3. Inventory management: Understanding landed cost gives you a clear picture of your cost structure, allowing you to make smart decisions about stock levels and order quantities. You can plan ahead to optimize your inventory turnover, reduce excess stock, and prevent stockouts.
4. Financial forecasting: Landed costs give you a clear view of how much to expect to spend on new inventory. That means you can better anticipate expenses, project future cash flow, and allocate resources. 

How to calculate landed cost

To calculate landed cost, add up all the costs of getting the product to your warehouse. 

As an example, let’s calculate the landed cost for a retailer importing laptop computers:

• Supplier: Overseas manufacturer in China
• Product: Laptop computers
• Quantity: 100 units
• Purchase price per unit: $1,200

Here’s the cost breakdown for this order:

1. Cost of goods sold (COGS):
   • $1,200 per unit x 100 units = $120,000
2. Transportation fees:
   • Air freight cost: $10,000
3. Customs duties:
   • Duty rate: 5%
   • Customs duties: 5% of $120,000 = $6,000
4. Import taxes and VAT:
   • VAT rate: 20%
   • Import VAT: 20% of ($120,000 + $6,000) = $25,200
5. Insurance costs:
   • Insurance for shipment: $500
6. Inspection fees:
   • Inspection and clearance fees: $300
7. Warehousing and storage fees:
   • Storage for one month: $1,000
8. Handling fees:
   • Handling at port and warehouse: $700
9. Currency exchange rates:
   • Currency conversion fees: $400

In this case, the landed cost formula is as follows:

COGS + transportation fees + customs duties + import taxes and VAT + insurance costs + inspection fees + warehousing and storage fees + handling fees + currency exchange rates = total landed cost

In the example above, the equation would be: 

$120,000 + $10,000 + $6,000 + $25,200 + $500 + $300 + $1,000 + $700 + $400 = $164,100

Divide this number by the number of units to determine the cost of getting each item from the supplier to the retailer’s warehouse. In this case, the landed cost per unit is $1,641. Now that they have this information, the retailer can add a markup that includes overhead expenses, marketing costs, and desired profit to set a competitive retail price.

3 tips to lower your landed cost

Some fees are unavoidable, but there are ways to lower the bill at the end of the day. Here are a few ways to reduce your landed cost:

1. Work with a freight forwarder: A freight forwarder is a third party that manages the shipping process on your behalf. It has relationships with shippers and insider knowledge that you don’t, which means it can help navigate complex routes, negotiate rates with carriers, and assist with customs to save you money.
2. Negotiate with suppliers: Working with suppliers to lower your cost per unit or apply a bulk discount can help lower your initial product cost.
3. Source products locally: The closer the supplier is to your warehouse, the cheaper it is to ship products. There are exceptions to this, so compare the cost of working with different suppliers to get the best deal possible.

Optimize your inventory management with Fishbowl

After breaking down landed cost, you can see just how many fees there are to track. Use a comprehensive inventory management tool that manages your stock count, incoming orders, landed costs, and more — like Fishbowl.

Fishbowl offers seamless integration with Intuit’s suite of QuickBooks products, streamlining your operations by linking your accounting and inventory management software. With this integrated solution, you can achieve unparalleled insights into your inventory’s true value — and save money while you’re at it. Book a demo today to discover how Fishbowl can simplify and elevate your business strategy.