When it comes to international shipping, there are fees that add to the actual price of the goods. These include taxes, customs fees, insurance, etc. Collectively, these additional fees are known as landed costs.
In this article, we cover everything you need to know about landed cost, from its definition to calculation. Let’s dive right in.
Landed cost is the actual cost of a shipment when it reaches the customer’s doorstep. In addition to the price of the goods and shipping fees, it also includes customs and import duties, insurance, and processing fees for handling and payment, among others.
In simpler terms, landed cost refers to the amount of money it costs your business to create and transport your products until your customer receives them.
Landed cost includes a variety of fees that you will have to pay throughout the process of your shipment. Commonly, there are four types of fees involved, which are:
Shipping fees make up most of your landed costs, referring to the true price of sending a package to your customer’s door. Shipping fees depend on specific shipping zones, package dimensions, and delivery speed, among others.
Customs and Import Duties
International shipment requires the settlement of customs and import duties. These can be paid either upfront by the seller or upon delivery once the package reaches the point of destination. In the latter's case, the buyer shoulders the customs and import duties.
Insurance and Compliance
Insurance coverage are, most of the time, optional in international shipping. But it’s recommended for high-value items to protect in case of loss or damage during shipment. If the seller or buyer elects to cover the goods with insurance, the price of the coverage must be factored into the landed cost.
Handling and Payment Processing Fees
Depending on the goods and the carrier’s policies, there may be additional charges for handling the cargo. These usually come in the form of surcharges. Similar to insurance, handling and payment processing fees go into the landed cost.
It is absolutely crucial for your business that you are aware of landed costs and how to calculate them. This helps you ensure that your business of manufacturing and shipping goods to your customers is profitable and economical. Here are some benefits of calculating landed costs as part of your business accounting.
Create an Accurate Budget
If your budget only accounts for the cost of creating your products and the shipping fees required to send them to your customers, your bookkeeping sheets will not reflect your business’s true expenses.
Landed costs can stack up and take a huge chunk of your budget. Because it’s the actual cost of manufacturing and shipping your products, you need to factor it into your budgeting efforts.
Analyze Your Supply Chain
Landed costs help give you insights into your supply chain and determine whether or not your current engagements, such as with carriers and shipping providers, are the most economical option for your business.
Once you get a better idea of how much landed costs are taking off of your cash flow, you can make efforts to change your shipping processes and engage more affordable providers that help your business save.
Make More Informed Decisions
Landed costs help determine if you’re making the best and most economical decisions for your business.
As you calculate landed costs and get more insights into your supply chain, you can make better decisions about which carriers or shipping providers to engage and which products are profitable, underperforming, or not bringing you any money.
It’s important to calculate landed cost properly to ensure that you’re putting the correct figures into your budget and accounting.
If you estimate a landed cost that is too high, you might end up racking up your prices to the point that your customers choose to buy from more affordable competitors. On the other hand, if you estimate too low, your cash flow will not reflect your true expenses, causing your profits to suffer.
Landed cost is computed using the following formula:
Manufacturing cost + shipping cost + shipping insurance + import duties + other fees
For simplicity, you can also use this basic formula:
Shipping + Customs + Risk + Overhead = Landed Cost
In case you want to compute the average per unit cost, divide the total value of your landing cost with how many units are in the order.
If you want more detailed insights into how much your business is spending, consider factoring in the following landed cost expenses:
- Freight shipping
- E-commerce logistics
Below, we explain each item in the base formula, so you better understand how to incorporate them into your calculations.
When it comes to your shipping costs, make sure you’re factoring in more than just the cost quoted by your carrier. A lot of expenses come into shipping your goods to your customers, which are also under the landed cost category. These include:
- Crating expenses
- Packing expenses
- Handling expenses
- Freight expenses
If you’re working with a freight forwarder, make sure they’re making it clear to you what costs are associated with your shipment.
Every country will have a customs authority that manages the flow of goods in and out of the country’s borders. That’s why you have to pay customs fees, which may include:
- Value-added tax
- Brokers fees
- Harbor fees
Risk expenses include insurance coverage, compliance fees, quality control expenses, stocking, inventory, etc. These all form part of landed costs, so ensure that you’re accounting for them.
A landed cost computation will also include your business’ operating costs. Consider the expenses you’re making in your purchasing staff, due diligence, travel, and exchange rates when calculating landing costs.
By now, you should know that landed costs make up a big part of your business expenses. That’s why it’s absolutely crucial for your business to be aware of them and how to calculate them. Doing so will ensure that you make the necessary decisions regarding your business budget, cash flow, and profitability.
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