Landed Cost: What Is It and How To Calculate It?

Various factors require the attention of a business owner, especially when the business is going global. In the bid to grow the customer base and increase profits, knowing the true total landed cost of products is crucial.

So, what is this landed cost after all? Businesses often confuse or miscalculate landed cost by missing out on plenty of costs incurred while transporting their goods. Landed cost is the true cost of goods. It is determined by factoring end-to-end expenses involved in delivering a product to the final customer.

Clarity on the true landed cost of goods can empower you with improved decision-making and pricing strategy. To enable such insights for you, we present to you a complete guide on what is landed cost, why you must understand the concept, and how to calculate landed cost.

Without further ado, let’s begin.

What is Landed Cost?

A landed cost can be simply understood as the total cost incurred by a vendor in the process of manufacturing, transporting, and delivering a product or service to its final customer. TLC, Total landed cost, and total delivered cost are all terms used interchangeably.

The concept of landed cost is sometimes not as simple as it sounds. Landed cost is determined by factoring in several expenses plus the basic ones. This includes all relevant expenses including the manufacturing price of the product, shipping charges, taxes, duties, etc. Several additional costs include packaging expenses, insurance fees, currency exchange rates, inventory management charges, brokerage, etc. Expenses mostly add up depending upon the product and international transaction. We will be discussing all these components in detail below.

Typically, landed cost gains more importance in the case of international shipping or imports/exports of goods. If your business deals with regular importing/exporting, it becomes crucial to have a thorough understanding of the landed cost of your products to enable an effective pricing strategy.

Calculating true landed cost is important for small business owners too. Knowing the expenses beforehand can help them keep costs competitive enough for the most optimal profit and larger customer footprint.

What Are The Components Of Landed Cost?

Various types of fees are factored in while calculating landed cost for imports/exports. While we list them out, it’s important to know that not all expenses may apply to your item/s in exchange. It is also possible to reduce some of these costs.

Here is an exhaustive list of the most common as well as additional components considered while calculating landed cost:

1. Product cost

The product cost can be understood as the manufacturing or purchase cost from other suppliers of any given product. It includes the total price of different raw materials and manufacturing components used in the making of the product.

2. Shipping cost

This is one of the major costs associated with calculating the total landed cost of international shipments. Shipping cost is the total expense incurred in the transportation of goods from the origin point to fulfillment centers and further delivery to the end customers. It included transportation, freight, and product handling charges.

Shipping costs can vary depending on the process used for the import/export of shipments. There are some other factors that affect shipping costs including container dimensions, delivery speed, and shipping zones.

3. Customs fees/import fees

There are certain regulations and fees imposed on imports and exports by every country. These are referred to as customs fees. It includes tariffs, duties, VAT, taxes, harbor fees, brokerage fees, and several other regulatory fees. Customs, duties, and taxes are a mandatory part of landed cost calculation for every type of international shipment. More so, the rates of these fees vary for different countries and even products.

There are two ways custom duties can be paid. First is DDP shipping which involves the seller paying these duties upfront. Second is DDU shipping where the end customer pays the duty while receiving the item. It's the decision of the seller on who pays the duties. In both cases, the landed cost gets affected.

4. Risk coverage costs/Insurance and compliance costs

These costs are mostly associated with overarching insurance, quality assurance, and trade compliance requirements of the shipments. Shipping insurance is often applied for expensive or sensitive packages. It is good to take up insurance for merchandise, especially items that need extra care, to protect them against theft, misplacement, or damage. The insurance charges can differ according to the value and category of the goods in transit. It is essential to include the risk coverage costs in the bottom line if paid for.

5. Port charges

These are the expenses occurring from using a port’s services. A wide range of port charges can get applied to shipments depending on their destination. It includes early/late port charges, demurrage, cancellation charges, and more.

6. Demurrage fees

This can be simply understood as storage charges or a kind of penalty. Demurrage fee is mostly applicable to international shipments that sit on a port longer than the free time allowed. The fee increases as the time for which shipments remain onsite keeps increasing.

7. Overhead costs

There are several other additional expenses associated with international import/export activities. Known collectively as overhead costs, they include different costs like carrying costs, payment processing fees, salaries for labor, etc. Exchange rates for currency are an important part of overhead costs which should be carefully monitored and duly incorporated in long-term product pricing. Covering the exchange costs in total landed cost has long-term benefits. Some shipments also bear handling charges or surcharges that also need to be included in landed cost calculations.

8. Free on board (FOB)

FOB or Free on board is applied to the entity responsible for damage to products in transit. This is not a directly applicable fee. However, when applied, FOB impacts the purchasing and final shipping expenses. It is a good practice to consider this fee while setting up the prices for products.

Why Should You Calculate Landed Cost?

Understanding and managing landed costs can significantly improve your business operations as well as financial management. Here are some of the reasons why you must understand and calculate landed cost correctly.

Accurate Product Pricing

Determining the correct landed cost helps greatly in setting product prices. Businesses can adjust the final product price without having to eat any expenses. At the same time, they will also be able to avoid over-pricing their products to end up losing customers and earnings.

Plan Budget Rightly

Most businesses only consider their manufacturing and shipping costs while calculating the profits. This is a common mistake that leads to false results. Landed cost represents the accurate and precise cost of any product as it considers all expenses starting from the broader to the most granular level. Thereby, the landed cost should be the ideal base for your budget and profits.

Avoid unexpected charges

It takes time and effort to understand how landed cost works and its imperative businesses focus on it. Doing so can help avoid unforeseen expenses and charges. These costs can lead your product to become unviable by impacting the bottom line.

Improve Your Supply Chain

While calculating the landed cost, you gain better visibility of different types of costs incurred and which ones are too high. This enables you to take steps to achieve supply chain efficiency.

For example, If the shipping costs are high, then you can collaborate with the carrier partners or find alternative logistics companies/fulfillment centers to reduce the costs, negotiate discounts and deals, or even switch to another mode of transportation. Another crucial decision is sourcing. Businesses can seek better markets for procurement and sourcing to balance their purchase per unit costs with overseas trade charges like international freight fees, cross-border taxes, customs fees, etc.

Execute Informed Business Strategy

Having an idea of the landed cost of products can help you make the right decisions. With a better view of all the costs, businesses can decide upon their marketing strategies and investments accordingly.

How To Calculate Landed Cost?

The primary components considered while calculating landed cost include- product cost, shipping charges, customs fee, risk expenses, and overhead costs.

This makes the following formula:

[Further, if you want to calculate the average cost per unit, then simply divide the total landed cost by the total number of units in the shipment.]

Calculating landed cost for a shipment can be simple or complicated depending on how granular you want to get while accounting for expenses. The key is selecting only those expenses relevant to your international shipment. For example, an export licensing fee would not apply to imports or FOB would not apply to undamaged products.

You should start by gathering all the possible information about the expenses related to the shipment. This will help you identify all the costs mentioned in the above equation along with the additional ones. You must also keep in mind that landing cost calculation differs with every product due to the different costs involved.

Even with a seemingly simple formula, there are many possibilities of errors occurring in the landed cost calculation. The consequences of these errors can be far-reaching. While under-valued landed cost can hurt the profit margins, over-valued landed cost can result in over-prized products further leading to customer loss.

There is no strict formula to calculate landed cost. The calculation varies depending on the industry and business type. Different methods of calculating landed cost are also available. Starting from spreadsheets and internal tools, businesses can also get help from supply chain experts or professional tools to formulate the equation applicable to their products.

Calculating the landed cost of imports:

Here is an example.

A business owner bought 100 units of product A for US $6 each, the total cost becoming US $600. She paid US$ 450 for shipping, US $50 for the duties and taxes levied on the product, got the shipment insured for US $100, and lastly US $50 for port charges. Additionally, she was also charged payment processing charges of US $1.5 for each unit.

Following is a simplified list of all expenses incurred on product A:

• Product cost: US $6 for each unit
• Shipping charges: US $450 for 100 units; US $4.5 for each unit
• Customs fees: US $50; US $0.5 for each unit
• Risk coverage fees: US $100 for insurance; US $1 for each unit
• Overhead expenses: US $50 port charges or US $0.5 for each unit, add to it payment processing charges of US $1.5 for each unit; US $2 for each unit

Now, simply add all the costs mentioned above as per the formula:

US $6 + US $4.5 + US $0.5 + US $1 + US $2 = US $14

The total landed cost for each unit is US $14.

To know the landed cost of the entire shipment, you need to consider the total costs incurred for 100 units of the product. In that case, the landing cost would simply become US $1400.

Some tips to calculate total landed cost:

Having an accurate landed cost can greatly help businesses push their profit margins. Therefore, to get precise results, your input data must be correct and well-calculated. Here are some tips to help you calculate landed cost without erring:

• Determine all the expenses carefully. From all that we have discussed above, it is clear that landed cost is a total of a wide variety of fees and costs. Listing out all such expenses involved requires a detailed assessment. Businesses should invest the required time and effort for this. Only then, they can gain clarity on accurate total landed cost and enable proper pricing of products for maximum profits.
• Find ways to reduce landed costs. Bargain for the best prices can also be the mantra for businesses. As a supplier or importer, you should look out for as many opportunities to bring down the expenses involved. For instance, shipping expenses constitute the major part of the landed cost. You can attempt to cut them by getting quotes from various logistics companies and carriers to choose the most suitable price for your purpose.
• Switch to automated landed cost calculation. Calculating landed cost manually can both be time-consuming and prone to errors, if not difficult always. Moreover, fluctuating fees and costs can affect product price as well as profits. Businesses can consider automating their landed cost calculation. This will have plenty of benefits including data accuracy, faster calculation, and optimized decision-making.
• Reading the process of landed cost calculation may represent it as tiresome and long. However, the time and effort invested are a sure bet at producing long-term benefits. The pay-off will be greater in the case of international trade activities.

Why Is Landed Cost Hard To Calculate?

One of the most common reasons is the lack of data, time, and desired resources, as cited by most business owners. The multitude of factors involved in the landed cost equation make the calculation and result difficult to obtain. Time constraint is another major issue that prevents companies from achieving the right results. The landed cost equation also needs to be updated constantly to address the changing expenses.

Want to determine accurate landed cost without investing all of your time in it? We have got you covered with our Landed Cost Calculator.

Learn More

It can be a major challenge to accurately determine the different expenses involved in landed costs. Apart from the major components explained in the list above in the article, there are plenty of other unexpected and potential costs that can emerge at any point. There can occur unanticipated costs from customs, inspections, and taxes along with other operations like sourcing, procurement, warehousing, and other in-house activities.

The expenses happen across a range of players including manufacturers, carriers, logistic partners, etc. It can become much more complicated to track all the points on a real-time basis or get any data.

Another problem is uncertainty over the expenses or costs considered to calculate the total landed cost. Various formulas also require varying degrees of sophisticated data.

Automated Vs. Manual Landed Cost Calculation

Given how tricky it can get to calculate landed cost manually, businesses should consider automating the process. The fast-paced global economy has produced pressing reasons for that. Manual calculation of landed cost is time-consuming and highly prone to errors. This can significantly impact the profits of business owners. Moreover, inaccurate landed cost can also hurt inventory efficiency.

Thanks to modern technology, there are business solutions facilitating the automation of landed cost calculations. Such software are easing the way for growing companies and small businesses into the global market by enabling effective product pricing and growing profits. Solutions like inventory management systems and ERPs allow one to calculate landed cost right on the platforms they are integrated with. Businesses can also use landed cost calculators that not only make landed cost calculations easy but effective too. They enable you to calculate landed costs for different countries before even importing/exporting to choose the most effective country to trade with.

Final Words

Being able to calculate the true landed cost for goods can bring you numerous advantages as discussed above. The benefits go far from gauging the hidden costs to making supply chains more efficient. Understanding the landed cost of your products means having complete data and information which is truly empowering. It enables optimized financial performance and advanced insights toward making well-informed business strategies.

This was all about landed cost. Hope you enjoyed reading! Reach out in the comments for any queries you may have.