- Landed cost is the cumulative amount of money a retailer spends to manufacture or acquire a product, ship it to fulfillment centers, store it and distribute it to customers
- FOB stands for freight on board, and he refers to the price a retailer pays to a supplier at the factory to acquire the products, without shipping and import fees
- Retailers need to learn how to calculate the landed cost for both domestic and international shipments
No one likes to be surprised. Especially when it comes to hidden fees. Unfortunately, more goes into eCommerce shipping costs than the actual shipping rates. Calculate and integrate the landed cost of the products you are selling such as taxes, duties, insurance, and overheads. Plus any other cost involved in getting orders to your customer's doorstep, otherwise you may end up selling at a loss without even knowing it — or surprising your customers with unexpected costs.
In this article, we help you figure out what landed cost is, its importance and effect on your eCommerce business, and the different components that help you calculate your business's landed cost accurately. We’ll also clue you in on how partnering with Easyship can help you shave those costs down through our shipping calculator and global fulfillment network.
Table of Contents
What Is Landed Cost?
Landed cost is the cumulative amount of money a retailer spends to manufacture or acquire a product, ship it to fulfillment centers, store it and distribute it to customers. It accounts for every cost incurred from raw materials, shipping, inventory carrying, and any other fees like shipping insurance, duties, and taxes.
Also known as net landed cost, landed price or total landed cost, the term is mostly associated with international shipping.
Why Is It Important?
Every eCommerce merchant should be aware of this cost to ensure they remain profitable. That’s because, apart from the cost of purchasing the product from suppliers, retailers incur extra fees to receive, store and fulfill orders. All these costs factor into your profit and erode your margins if you’re not careful.
Unless you’re aware of the costs incurred and have a way to build or integrate them into the listed price, you may end up running a loss. Here is why knowing how to calculate landed cost is important.
- Know your bottom line: Unless you know the cumulative cost of the items you’re selling, you won't be able to calculate your net profit or loss. Being aware of any down-the-road fees is the first step in determining the profit potential of your products.
- Choose products carefully: Make informed decisions about what you’re selling. That way, you’ll know which products are worth your effort and which are not.
- Follow your supply chain: Once you’ve done the math, you'll be able to gain insight into the supply chain and realize where profits are sinking. You can then take a hard look at your manufacturers, suppliers, and shipping partners to negotiate for rates.
Related: Shipping Glossary
What Is The Difference Between FOB and Landed Cost?
Though the two costs are closely associated with international shipping, they’re not the same thing.
FOB stands for freight on board. The term refers to the price a retailer pays to a supplier at the factory to acquire the products, without shipping and import fees. It includes export packaging, fumigation, documentation, packing into the container, and delivery to the shipper.
Landed cost is the total cost of acquiring and shipping a product. It refers to the total cost paid by a retailer until the product lands on the customer's hands. Here, common costs include shipping, customs clearance costs, insurance, and overheads.
How to Calculate Landed Cost?
Retailers need to learn how to calculate the landed cost for both domestic and international shipments. Using a cost-specific calculator, like a duty and taxes and a shipping rates calculator, makes it easy to get the big picture — even if you’re not good at numbers. Here is how to calculate the landed cost.
Product + Shipping + Customs + Insurance + Overhead
Let us look at an example of calculation in action. Say you are an eCommerce merchant selling Smartphone covers. You purchase 250 iPhone covers at $5 each for a total of $1,250. You pay a 2% customs duty, freight of $100, and also take an insurance cover of $100 for your entire shipment. You further incur a shipping cost of $2 to send each order to your buyers. You also have to pay a $0.5 payment processing fee per unit.
Here is a breakdown of the hidden fees for component of your items:
Shipping: $100 for freight + ($2*250 =$500)=$600/250=$2.4/unit
Customs: 2 percent =0.02*$1250= $25/250 $0.1/unit
Risk: Insurance of $100/250= $0.4/unit
Overhead: payment processing =$0.5/unit
Total = $5 + $2.4 + $0.1 + $0.4 + $0.5 = $8.4
In our example, you will need to sell each smartphone cover for $8.4 to break even. From there, you can set your profit margin. If your listed price is $10, then you are only making $1.6 per unit. Setting the price at $15 or $20 will help you stay profitable and grow your business.
What Are The Components of Total Landed Cost?
Several components account for the total cost of your eCommerce business. Any factor or cost that contributes to the expense you incur to fulfill orders and get items to your buyers' doorstep is a component. Generally, there are five factors that you should consider:
- Product cost
This is the cost of manufacturing or acquiring the product from manufacturers or suppliers. It accounts for the raw materials and other manufacturing components.
You can reduce the product cost by streamlining your manufacturing processes, sourcing cheap raw materials, or obtaining supplies from manufacturers who sell the product at a favorable price, widening your profit margin.
This includes the cost of transporting goods from suppliers to your fulfillment centers and then mailing packages to your customers. Handling fees, freight, and transportation costs all make your shipping expenses.
Depending on how you import and export your products, you may end up with varying shipping fees for inland, air or ocean freights.
Shipping zones, delivery speed, and package weight are all important factors that determine your shipping costs when sending items to your customers. To remain profitable, you need to know how much per unit it costs to send packages to customers.
You can reduce shipping costs by negotiating better carrier rates, or partnering with 3PL suppliers in different locations so that your inventory is stored closer to your end customers. This will help reduce shipping costs and transit times.
Although hidden fees can happen in domestic shipping, the term has come to be associated mostly with international shipping because of those pesky customs-related fees.
If you source products from foreign suppliers or sell to customers overseas, then you will face import and export fees. Duties, tariffs, brokerage fees, harbor fees, taxes, Value-added-tax(VAT), levies and any other customs regulatory fees are all part of customs expenses that add up — fast.
Most of the time, customs, taxes, and duties are inevitable. But you can avoid or reduce them by having fulfillment centers in different countries so that orders are shipped domestically. The best way to implement this strategy will be to work with a 3PL company like Easyship that has a network of wholesalers in different countries to help reduce costs.
- Risk Coverage Costs
Risk coverage is the fourth component. It has everything to do with protecting your cargo while it’s in transit. It boils down to insurance expenses and other quality assurance and compliance fees.
Though shipping insurance is optional, it is an important service for securing expensive shipments, and anytime you pay extra to secure your merchandise or packages, you should factor such fees into your bottom line.
Using courier services that include insurance for valuable packages is an excellent way to mitigate insurance costs and reduce the cost.
- Overhead costs
Overhead include inventory carrying costs, staff wages/salaries, payment processing fees, exchange rates, and any other costs associated with everyday eCommerce business operations.
Though some of these fees can easily be forgotten or ignored, keeping them in the back of your mind will help you determine whether you are doing a truly profitable business.
Partnering with 3PL vendors to host your inventory and fulfill orders on your behalf is a good way to keep overhead costs low.
The Bottom Line
As you can see, it is important to keep tabs on your total cost so that you don't end up shooting yourself on foot and eroding your profit margins. The only way to do so is to find the right shipping tools that will help you calculate your net landed cost accurately, and then interrogate your supply chain to bring the cost down so that you can remain profitable and compete favorably in the eCommerce retail space.
From our duties and taxes calculator to our shipping rates calculator, Easyship provides you with all the tools you need to get up to 89% discounted shipping rates from a network of over 250+ couriers to reduce your landed costs.
Sign up for a free Easyship account today to get started!