When importing products, in order to save costs and increase profits, usually buyers will bargain with suppliers. But this aspect alone is not enough, you will find that when the final goods arrive, you pay far more than the cost of the goods. Because shipping costs and import duties are also part of the total import cost, and even account for a large proportion. Buyers knowing in advance the actual final cost of imported products can make informed decisions for their sourcing operations. Knowing the landed cost of imported products allows businesses to plan how much money they need to invest to buy the product and ship it to its destination. On top of that, it can also help businesses plan sales price and profit data that will be generated when products are sold. Not only is knowing how to calculate landed costs important, but it is also necessary to run a successful business.
Like we all say “The little things in life make a big difference”, and it’s the same maxim true for business exactly. Businesses that are involved in Global Trade are faced with dozens of additional costs, fees, and charges involved with importing products through to the destination. It’s imperative that buyers understand the actual final costs of imported products ahead, to make good decisions for their business.
Minor factors may have an impact on profitability, and those who consider seemingly trivial costs often make their grade successful. Therefore, it is imperative to get clear of the total landed cost of all the goods you may ship. This guide will assist you in being fully aware of how to calculate your total landed cost! Even no accounting degree is required.
What is the Landed Cost?
Knowing how to calculate landed costs is important, and it is necessary to run a successful business. “Landed cost” is the term used at the moment when it refers to the final cost of a product plus all related transportation and logistics costs required to deliver the goods to the destination. Throughout the global trade process, there can be dozens of additional fees, charges, and currency conversions that buyers must know ahead of time in order to calculate the landed cost of a product.
Some of the import costs include the cost of the products, currency conversion costs, international freight & logistics charges, import charges, port charges, customs clearance fees, import duties & taxes, and local delivery, to name a few.
Why is a Landed Cost Calculation Important?
There are apparent and underlying costs in delivering any product to customers. Sometimes the true cost of what you sell may seem opaque, but being an expert in understanding the landed cost can bring clarity. Knowing your landed cost also enables you to overall evaluate your business performance, maximize your pricing, and ensure you know exactly how much you’re paying for inventory. It also gives you the opportunity to analyze your supply chain and identify where you can cut costs. Eventually, the content we have written here will help you calculate whether you will be able to profit from your product, or even if your business model is sustainable and feasible.
However, calculating your landed cost can be sophisticated provided that you may not have a full idea of your entire cost or can’t predict how high the cost will be added. The bullet point is to have to be aware of predicting and estimating the value as clear to the actual cost as possible.
If businesses do not take the time to understand their landed cost, they could be faced with unexpected fees and charges which could make importing the products unworkable. Calculating the landed cost requires an understanding of some key costs and correctly applying them to each product to get the final landed cost per item.
How to Calculate Landed Cost
Calculating the landed cost could be tricky and cumbersome in a pinch. Estimate too high and you may lose out on sales because of your pricing. Estimate too low and your profits could suffer. That’s why it is necessary to know it better.
The following is a list of required information that you will need to know precisely to calculate the landed cost of imported products.
- Shipper & Consignee’s details
- Incoterm® & Place
- Port of Loading (POL) & Port of Discharge (POD)
- Currency
- Product details and pricing
- Product HS/HTS Codes
- CBM(carton size)
- Shipment type (by Full Container – FCL, or Less-than-Container-Load LCL Cargo).
Landed Cost Formula
This is the standard equation that you will be calculating:
Product Cost + Shipping + Customs + Risk + Overhead = Landed Cost
Product Cost
The cost of the product is the largest component of the total cost. This is negotiated between you and the supplier. The agreed terms are generally EXW or FOB, the main difference between the two is customs declaration or not. The FOB price is higher than the EXW price, inland fees and custom fees. If the terms you negotiate are these two, the buyer is responsible for all the remaining costs.
Shipping Cost
Freight is affected by many factors. There is more to shipping than boxing your goods and putting them on a boat (or plane, truck, train, etc.). There are costs associated with every aspect of the process, including crating, packing, handling, and freight. You should always understand exactly what you are getting in your contract with a freight forwarder, as there are many different options of varying seller responsibility and liability.
In terms of shipping methods, the transportation of small-volume goods is mainly divided into shipping by sea, by air, by railway and express delivery. Generally speaking, shipping by sea and railway is the cheapest, followed by air, and express is the most expensive. Even if a shipping method is selected, the price is also affected by the timeliness, and faster shipping timeliness is bound to be accompanied by higher prices. In conclusion, choosing the slowest sea freight is often the cheapest.
If you want to make a more detailed analysis of the transportation cost, it is also composed of the following parts:
*Transportation cost
*Freight insurance
*Terminal handling charges (THC)
*Handling fees
*Clearing fees
*Document fees
*Surcharges (BAF & CAF etc.)
*Security surcharges (ISPS & ISS)
In order to get the most accurate shipping rates, make sure that when you check the price with the forwarder, the price they quote covers all costs. You can contact with many freight forwarders to get a confirmed quotation to get products shipped through to your location and compare. At the same time, don’t just compare prices, because aging is also a big factor.
Customs
Every country has its own authority for supervising the flow of goods into and out of its borders. These agencies are also responsible for collecting any duties, tariffs, value-added tax (VAT), brokers fees, harbor fees.
Risk
The costs of avoiding risk can add up, but not covering them can be even most costly. Insurance, compliance, quality, and safety stock inventory are all vital considerations.
Overhead
Operating costs are the final part of the landed cost equation. Purchasing staff, due diligence cost, travel, and exchange rates are included in overhead.
Landed Cost Example
Suppose you are planning to import 200 units of a product from Ningbo to Los Angeles. The per-unit cost is $100. The freight cost for the shipment is $2000 and it represents two-quarter of the shipment. The duty charge is set at 4%.
Per Unit Cost + Freight Cost + Duty Charge = Landed Cost Per Unit
$100 + ((2000 * 50%) / 200) + (4% * $100) = $109 Per Unit
Let’s throw a curveball into the equation. Let’s say your goods are held at customs for five days and you are charged $50 for each day:
Per Unit Cost + Freight Cost + Duty Charge + Additional Charge = Landed Cost Per Unit
$100 + ((2000 * 50%) / 200) + (4% * $100) + (($50 * 5) / 200) = $110.25 Per Unit
The unforeseen cost added an additional $3 to your landed cost per unit. Given this information, you may select to adjust your pricing model.
In summary
All factors need to be taken into account when calculating the total cost of imports, otherwise there is a high risk of loss. If businesses do not take the time to understand their landed cost, they could be faced with unexpected fees and charges which could make importing the products unviable. Calculating the landed cost requires an understanding of some key costs and correctly applying them to each product to get the final landed cost per item.
Landed cost is the actual fee you pay for your imports. The three main elements of landed cost are: product cost, shipping cost and import duty & taxes. Together, these costs significantly increase the price of your product. Be cautious, other costs might be incurred in the process such as: inspection, currency and travel expenses. It is evident that these should be added to total cost calculation.
