International trade has created a global-scale supply chain that integrates millions of companies worldwide. Although free trade is in its golden age, joining this network of exporters and importers is not as easy as it seems.
One of the most important but often overlooked aspects of running a business is landed cost calculation. While it can be tricky to calculate, landed cost is essential for understanding the final cost of goods and making informed purchasing decisions.
In this simple guide, we will walk you through the basics of landed cost, including how to calculate it for your business.
What is Landed Cost?
By definition, landed cost is the sum of costs incurred until the internationally traded products reach the importer's warehouses.
The content of these costs, also called the landing price, covers all the expenses incurred by the importer:
- Customs duties and taxes
- Products leading price
- International shipping
- Local transportation to the warehouse
The total landed cost ratio to the total number of items provides the unit cost calculation. An importer must correctly calculate these costs to price the products profitably.
Landed cost is the total cost of ownership of an asset including all expenses related to its acquisition, transport, import duties, insurance, and other associated costs.
Why You Need to Calculate Landed Costs
For importers, landed cost can be an important factor in decision-making when considering whether to purchase a good or product. It is essential to calculate the cost of goods and supplementary charges, including the selected incoterms, to make the correct pricing.
Today, trade flows rapidly, and product prices and costs constantly change. In this process, an accurate landed cost analysis provides the importers with the following advantages:
- Enables you to determine the product prices correctly, with the proper determination of the cost items that affect the competition
- It allows you to take action against uncertain costs
- Increases your competitiveness by providing accurate predictions of costs and product prices
- Helps you negotiate the starting price with the exporter and the incoterms you need to choose
- Allows you to determine the most precise payment method
- Contributes to the optimal cost-effective operation of your supply chain
Because of all these conditions, it is critical for importers to know what the landed cost covers and how to calculate it.
Landed Cost Analysis
Some of the costs that will occur during the import process are within the importer's control, can be foreseen from the beginning, and can be fixed with service procurement, contracts and contracts.
However, some costs are beyond the power of the importer. They can predict the variability in these costs with additional charges by setting approximate margins of error or by making special contracts with service providers.
For example, you can get an annual price from a freight forwarder for transporting ten containers per month to a destination where you regularly import. Thus, you will not be affected by fluctuations in freight prices.
Similarly, to protect against currency fluctuations, you can determine the payment method as the letter of credit (LC) and request a fixed rate from your bank in return for an additional commission.
How to Calculate Landed Cost
To accurately calculate landed cost, you will need to consider all relevant factors and input the correct data into your landed cost formula. Importers determine the cost items which will be included in the "landed cost calculation" according to the Incoterms. Based on the Incoterms, exporters may also bear some of the cost items.
This can seem daunting at first, but we are here to help make it easy. Here's a step-by-step guide to calculating landed cost:
- Add all the expenses incurred until the products reach the importer's facilities to the export invoice submitted by the exporter
- Determine the unit cost by dividing the landed cost by the unit product quantity (pieces/kg)
- Determine the product's sales price in the importer's country by adding the profit margin to the final price
How to Calculate Freight Cost Per Unit
To calculate the landed cost per unit, you will need to know the total landed cost and the number of units sold. Once you have this information, you can divide the total landed cost by the number of units sold to find the landed cost per unit.
Keep in mind that the cost per unit will vary depending on the products being shipped and the shipping destination. For example, if you are shipping products from China to the United States, you will need to factor in different import duties and taxes than if you were shipping products from Canada to the United States.
As a result, you need to take all of the factors that can affect landed costs into consideration before calculating them.
Landed Cost Formula
There is no universal landed cost formula — how you calculate it depends on factors unique to your business. However, researchers have determined a general typology for selecting an appropriate total landed cost method in international supplier selection decisions.
The landed cost formula is the sum of the product's costs, including transportation and insurance, plus any import duties or tariffs. To calculate landed cost, you will need to know the product's:
- Cost per unit
- Shipping and handling charges
- Customs duties, tariffs, or taxes
- Risk (compliance, insurance, quality, and safety stock)
- Overhead —(operational costs such as currency exchanges, staff costs, travel…)
Once you have all of this information, simply add it up to get your landed cost.
Example of How to Calculate Landed Cost of Imported Goods
Suppose a case in which a US importer imports 4,000 container keyboards (musical instruments) from China at a price of $5 per unit.
A 10% customs duty is applied for these products with HS Code: 9207 and Incoterms Free on Board (FOB), and the US importer organizes the cargo shipment from Guangzhou port to New York. After the transportation insurance, New York port expenses, and import and customs expenses are covered, the products are now the property of the importer. The importer finally organized the inland transportation of the container waiting at the port to be delivered to the New Jersey warehouse.
The landed cost calculation formula would look like this in this example:
- $5 (Unit Price) x 4,000 (Number of Units)
- + $4,000 (Freight)
- + $800 (Customs Clearance)
- + 2,000 (Import Duty of 6%)
- + $500 (Cargo Insurance)
- + $1,200 (New York Port Expenses)
- + $800 (Inland Transportation Expenses)
- = $29.300
The landed cost for each product would be calculated by dividing the total landed cost by the number of units imported, which in this case would be:
- $29.300 / 4000 = $7,325 per unit
Make Informed Decisions
At its core, landed cost is a calculation of all the costs associated with getting a product to your customers. This includes the price of the goods themselves, as well as any shipping or handling fees, taxes, and duties.
Understanding your company's landed cost can help inform pricing decisions, sourcing strategies, and even marketing plans. By knowing exactly how much each product costs to bring in, you can better assess whether certain items are worth importing and whether or not you're offering competitive prices while also keeping your margins healthy.