What is Landed Cost? [Updated: Sep 2021]
There’s more to pay in international shipping than the price of transporting goods from A to B. Many of the other costs may not be immediately obvious to the novice shipper. Nevertheless, it’s essential for enterprises to understand the full price of shipping—the landed cost—to help them accurately price their products and balance their books.
Landed cost is the full and comprehensive price of international shipping in which ‘hidden’ extras are brought out into the open. It’s the total amount an importer/buyer pays to buy a product from a supplier and ship it to their customers. For exporters/suppliers, landed cost is the price of manufacturing a product and exporting it to their customers.
As with much of the terminology used in shipping, the term ‘landed cost’ goes by several names:
- Total landed cost
- Net landed cost
- Landed price
- Total delivered cost
The importer of goods usually pays the landed cost, although this is not always the case. Sometimes the exporter pays, or the cost is split between importer and exporter. Much depends on the agreement reached between both parties.
In a shared agreement, the seller typically takes responsibility for costs incurred until the point the goods are loaded onto the shipping vessel. After that, responsibility for costs passes to the buyer.
Whatever the payment arrangement, it’s important that all parties are aware of landed costs. Any agreement should use the correct INCOTERMS, which set out the financial and risk obligations of the shipment’s consignor and consignee respectively.
Knowing the landed cost of a shipment helps enterprises in several ways, the most important of which are outlined below.
Gives More Accurate Information
Whoever is responsible for finances within an organization will want to know the full cost of international shipping. Additional costs on top of standard shipping fees can be substantial, and the landed cost gives the full picture of what’s payable.
Supports Price Optimization
When the landed cost is known, exporters can price their goods at a level that helps them realize a profit on sales of those goods to overseas customers. To maximize the effectiveness of any product-pricing strategy, precise knowledge of landed cost is essential.
Beware the dangers of relying on an estimated landed cost. Overestimating the landed cost can result in overpriced goods and lost customers. Underestimating landed cost brings the risk of losing out on potential earnings.
Helps Reduce Expenses
Knowledge of the landed cost allows a business to calculate which links in their supply chain are costing the most and where savings can be made.
Supports Global Expansion
Teaming-up with foreign suppliers and making goods available for sale to international customers are both good ways to grow a business and customer base. By identifying the landed cost, an enterprise can calculate a unit price that helps ensure their international sales deliver a profit.
Landed costs will vary depending on the country of import. For instance, the United States bases the assessment of duty payable on the cost of goods sold (CoGS). Other nations assess duty based on CoGS plus the cost of insurance and freight (CIF).
It’s not necessarily easy to work out the total landed cost of goods. However, there is a landed-cost calculation formula that can help. It looks like this:
Landed cost = Product + Shipping + Customs + Risk + Overheads
To work out the landed cost per unit, simply divide the total landed cost by the number of units in the shipment.
Using Automation to Calculate the Landed Cost
Few organizations have the time and resources to work out the landed cost of every shipment—but help is at hand. Landed-cost calculators are available online, and inventory management software can be purchased to quickly and accurately calculate the landed cost.
The cost of international shipping covers a wide range of expenses. It’s important to know what they are to avoid any nasty surprises when the final cost is calculated. Based on the landing cost calculation procedure above, we can see that the landed cost is typically divided into five elements. Let’s take a closer look at each:
1. Product Costs
This is the amount the importer or buyer pays the supplier for the goods, or the amount paid to procure materials and manufacture the goods. The commercial invoice associated with the consignment will show this price.
2. Shipping Costs
This expense covers:
- Crating or packing
- Carrier costs and freight forwarding fees
If multiple modes of transportation are used to deliver the goods, they will all need to be included in the cost calculation. Freight forwarders will usually charge a fee that includes international shipping, handling, and road or rail-based transportation of international ocean and air freight.
3. Customs Costs
Exporters pay export fees. Importers pay import fees. In both cases, customs officials at international borders will collect fees associated with international shipping. These charges typically include duties, levies, VAT, and tariffs.
The amount payable is calculated by reference to the shipping documents accompanying a consignment. In many countries, duty calculations are based on the cost of goods, insurance, and freight (CIF).
It’s therefore vital that all documents, particularly the commercial invoice, are accurately completed. If forms are not correct, delays can occur, which, in turn, may increase the landed cost (see Overheads below).
Tax payments are a key landed cost. Tax policies differ from nation to nation, so shippers should be aware of these before shipping. It may be possible to get tax relief, depending on the tax policies of the territories between which you are shipping.
A consignment may require a permit, export license, or other type of official document for which a fee is typically payable. Shippers should apply for any such documents well before their shipment is due to leave the country of export.
4. Risk/Protection Costs
Shippers should always insure consignments against loss or damage during shipping. Some insurance cover is usually built into the shipping cost. Freight forwarders often include insurance as part of their quote, but exporters and importers can also arrange cover.
It’s important to know the difference between freight insurance and cargo insurance. In simple terms, freight insurance protects the freight forwarder, cargo insurance protects the shipper.
Using the skills and knowledge of a compliance company to ensure documentation meets requirements will also incur a cost.
Hiring QA experts or buying QA tech can also add to the landed cost, which is part of the local processing cost and separate from the shipping transaction. If the product is only available to them after inspection and approval, a company can consider QA tech as part of their landed cost.
Exchange rates will apply to international shipments. These could work in the shipper’s favor or against them, depending on when the shipment is being made, and where the shipping is coming from and going to.
Sometimes called demurrage, a storage fee is payable for containers that remain in a terminal beyond their allotted free time. Ports will allow containers to stay on-site for a limited period. Exceed this limit and charges can be levied.
Containers can ‘overstay their welcome’ in ports and incur charges if, for example:
- Unloading takes longer than normal
- Delays occur during customs clearance, perhaps because of a problem with paperwork
- Collection of the container and/or its contents from the port is delayed
Carrying Costs, Handling Fees, Packing, and Repacking
Freight forwarders usually include these costs in their quote. But shippers that choose to export without engaging the services of a forwarder will need to calculate these expenses and add them to the landed cost.
Often, there are variations in the landed cost of similar or identical shipments. Fees, duties, taxes, exchange rates change regularly and these variations will cause the landed cost to be different each time.
That may sound like a stark warning, but knowing the landed cost of a goods consignment is vital to everyone engaging in international shipping.
The add-ons and extras inherent in exporting and importing can be substantial. Budgeting for these costs will ensure businesses pitch the prices of their products accurately, helping them to enjoy profitability on the goods they ship to international customers.
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