International Trade Landed Cost Calculation + Template
Selling internationally and dealing with abroad suppliers are excellent ways to expand your business. You expose your brand to new markets, new audiences, and new sales opportunities. Developing supply chain demand business abroad is an excellent way to obtain competitive pricing and new products.
However, when dealing with import and export, you should add business prices to the inventory analysis. If you buy an item for $5, sell it for $10, and spend $10 to fulfill the order, you will lose money. This for sure.
Below is just a basic example of the net landed cost formula. Below, we will look at the landed cost definition, why it is important, and how to calculate it. Here is what we will cover:
What is the landed cost?
The importance of landed costs
How to use the total landed cost formula to calculate the cost of imported goods.
Net Landed cost analysis: How to reduce expenses and increase profits
What is Landed Cost?
The landed cost definition is the sum of a seller’s costs related to the product from the production to the moment the product is in the customer’s hands. This includes the purchased product’s price and taxes, insurance, currency exchange, and handling fees. Landed costs are usually used for international transportation goods.
Landed cost is also called landed price, total landing cost or net landing cost-so landing price and net/total landing cost are defined the same. You will see that we use all four terms interchangeably throughout this article. Some buyers also call it total delivery cost.
Which of the following best describes the concept of total landed cost?
A. The sum of all logistics costs related to a product.
B. The lowest logistics cost for a product.
C. The sum of all product- and logistics-related costs.
D. None of these.
The right answer is: C
The Importance of Landing Costs
The total landed cost is very important for the brand. The price you pay to the supplier is not the total price you finally pay-you will have additional fees to pay for receiving the product and fulfill the order. These expense factors affect your profits, and you cannot add these expenses to your customers.
Imagine buying a product listed at $50 and seeing the total amount more than doubled because of the extra cost? This will quickly send shoppers to your competitors. In some cases, it may even be illegal to charge customers. (It depends on the product and location.
Sometimes, each item calculates the net landed cost (which is more accurate). In other cases, you can calculate each batch. This means that sometimes your landing price will be different. In addition, some related costs may change. It is normal for your total landing cost to fluctuate.
Tracking your total landed costs will tell you to stay profitable, especially since many related expenses are hidden. For example, you may be applying a markup formula to a product and want to know why you are not making any money. If it is not enough to cover the additional landed costs, then this is why you are not profitable.
Landed Cost vs FOB
FOB includes packaging, fumigation, grade, packaging into containers, and delivery to a shipper. Landed cost is the total cost of buying and shipping products. It is the total cost paid by the retailer until the product is delivered to the customer.
What Does the Total Landed Cost Includes?
As mentioned earlier, the net landed cost includes every cost you incur in order to fulfill the order and deliver it to the customer. There are five categories of landing prices:
Let’s take a deeper look at the net landed costs for each of the following categories:
This product is the most direct data point. This includes the unit price you paid to obtain the goods from the supplier. Product prices account for part of materials and components.
shipping costs include packing, packaging, loading and unloading, freight and transportation. Depending on your reasons for importing and exporting products, you may have to pay for inland, ocean and air transportation.
Customs include the import and export of your products. If you buy from a foreign supplier, you will be charged an import fee. If you sell products to customers in different countries/regions, you will charge export fees. Customs fees include duties, taxes, duties, taxes, value-added taxes, brokerage fees, port fees and other regulatory fees.
Risk includes any expenses you pay to protect your business, products, and customers. This means the costs of insurance, compliance and quality assurance. This also includes anything you invest in safety stock.
Indirect costs involve purchasing personnel, due diligence, travel, exchange rate/currency conversion, payment processing fees, transportation costs, purchasing agent commissions, corporate income tax and bank fees.
How to Calculate Landed Cost?
You can use the net landed cost calculation formula to learn how to calculate the cost of imported goods. First, let’s start with the total landed cost formula:
Landed cost = product + shipping+ customs + risk + overhead
To calculate the landing cost, you can find the sum of the products, transportation, customs, risks, and overheads defined above. This number is your total land cost.
Looking for an inventory management software that can automatically calculate the net landing cost formula. Doing this manually on a consistent basis will be very slow and tedious, especially if you have many SKUs.
It is also important to be as accurate as possible, and the use of technological automation can ensure this. If the calculated net landing cost is too high, you can price the customer by purchasing the product. If you go too low, you can cut your profits.
Example of how to calculate the Landed cost of imported goods
Let’s take a look at the calculation of landing costs in action: Suppose, your business, which is located in the United States, sells backpacks.
You bought 250 backpacks from a supplier in China at a price of $10 per unit, for a total price of $2,500. The tariff is 2%, and the freight for the entire cargo is $500. You pay $100 for shipping insurance and $5 for each package sent to each customer (let’s assume that each order has a unit-you can see this calculation becomes tricky). Every transaction is processed in U.S. dollars, but you also pay a payment processing fee of $2 per unit.
Here is how you can use the net landing cost formula to calculate the cost of imported goods:
Shipping fee: The shipping fee for 250 units is US$500, or US$2/unit
Customs: 2%, which is US$50, or US$0.20/unit
Risk: $5 each shipping fee+$100 insurance fee/250=$5.4/unit
So the total Landed cost = $10 + $2 + $0.20 + $5.40 + $2 = $19.60
In this example, you need to sell each backpack for $19.60 to break even. And if you want to make a profit, the marked amount is even higher than this.
Landed cost analysis: how to reduce expenses and increase profits?
Although improve the list price is a way to reduce total landing cost, landed cost analysis can show that you find other opportunities that may have a greater way to reduce the expenses landed without burdening customers.
Related: 2 ways to reduce Landed costs
Audit Your supply Chain
One of the most effective ways to use landed cost analysis to reduce expenses is to audit your supply chain partners. Remember, the lowest price does not always translate into the greatest profit
Unexpected expenses may increase your total landed cost. Compare prices with different manufacturers, suppliers, 3PLs, shippers, etc., and study the actual net landed costs to determine which is the most suitable for your growing business. You can also try to negotiate better rates and packages with existing partners.
Use Inventory Management
Understanding the various metrics in your business is the best way to stay data-driven and ensure you achieve real profits. Inventory management software can be integrated with multiple technologies in the entire supply chain to automate total landing costs for you.
International trade is complex, and understanding the Landed cost is very important to ensure you profitability. There are a lot of calculations for each shipment, and the freight is dynamic, so you need good forecasting and data capture.