If your business moves products from one location to another, you know all too well that transporting inventory doesn’t come free. Most companies work diligently to ensure they charge the right amount for shipping—or bake the correct costs into their product price should they offer free shipping to their customers. That’s where landing costs come in.
Also known as true cost, landed cost is the sum of all the different taxes and fees associated with shipping a product plus the cost of creating the product itself. Landed cost includes the cost of customs, risk, and overhead, too. Landed cost helps businesses determine the absolute lowest price for the products they sell. After all, if a company were to set a wholesale or retail price without considering landed cost, they could end up losing money with every order. To protect your businesses from pricing issues, you’ll need to learn to calculate landed cost. Landed Cost Definition
How to calculate landed cost
To calculate landed cost, you’ll need to sum up the cost of creating the product, shipping it, insuring it—plus all your overhead, too. Once you’ve calculated the landed cost for your products, you can price your inventory with confidence.
Landed cost = product itself + shipping + taxes + insurance + overheadCalculating landed cost is more complicated than simply checking shipping rates with your preferred courier. So here’s a little bit more about each of the categories you’ll need to price.
Product costs
When calculating landed cost, the first step is determining how much your product actually costs to manufacture or buy.
If some of your product costs fluctuate by season or as demand changes, you’ll want to account for that. You can either work with an average cost or update your variable product cost whenever you reprice your inventory.
Shipping costs
Shipping cost is the dollar amount it takes to move your products from where they are to where they need to be. Many things determine shipping costs, including box size, whether your products ship by air, sea, or ground and your desired shipping speed.
Of course, shipping rates can fluctuate a bit—so if there’s a range, choose an average price or play it safe by overestimating shipping costs. And remember, if shipping rates ever skyrocket, you can always revisit the landed cost formula and recalculate this expense.
Taxes, customs, and fees
After determining shipping costs, you’ll need to account for any additional taxes, fees, customs, or tariffs you pay to move products around the globe. Prepare for sizable costs if you import or export goods.
Sometimes, using an international fulfillment center can help you save money on specific fees by making a “domestic sale” to your end-customer in the same country. But other times, maintaining fulfillment centers across the world costs more money than it saves.
You could also pass along certain duties to customers, but many merchants prefer to bake such fees into the sale price to avoid friction—or the chance that a customer will refuse the package and not pay the fee.
Overhead expenses
Next, you’ll need to factor in your operating expenses, including storage, labor, and utilities.
If you’ve already included some of these expenses in your manufacturing cost, there’s no need to count them twice. And if you’re having trouble calculating your overhead expenses, ask your accountant for help.
Risk management expenses
Finally, you’ll need to add any risk mitigation expenses into your landed cost calculation. This includes insurance and compliance.
Some people also factor in the cost of quality control audits and even carrying safety stock into their risk management expenses.
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