Landed Cost: What It Is and How to Calculate the Cost of Imported Goods
Stitch is an operations management and inventory accounting platform for modern, high-growth brands.
Selling internationally and dealing with foreign suppliers are great avenues for scaling businesses. You expose your brand to new markets, new audiences and new sales opportunities. And doing business abroad for supply chain needs is a great way to get competitive pricing and access to new materials.
But when you’re dealing with imports and exports, you’re adding to the price of doing business into your inventory analytics. If you purchase an item for $5, sell it for $10, and have to pay $10 on top of that to fulfill the order, you’re losing money.
That’s just one basic example of a net landed cost formula. Below, we’re going to look at the landed cost definition, why it matters, and how to calculate it. Here’s what we’ll cover:
- What is landed cost?
- The importance of landed cost
- How to calculate cost of imported goods with the landed cost calculation formula
- Landed cost analysis: How to reduce your expenses and increase profits
What is landed cost?
The landed cost definition is the sum of all a sellers’ costs associated with a product, from the time they produce the product to the moment it’s in the customer’s hands. This includes the price of acquiring the product, plus things like taxes, insurance, currency conversion and handling fees. The landed cost is typically used for internationally shipped items.
Landed cost is also referred to as landed price, total landed cost or net landed cost — so the landed price and net / total landed cost definition is the same. You’ll see us use all four terms interchangeably throughout this article. Some also call it total delivered cost.
The importance of landed cost
The total landed cost is important for brands to know. The price you pay your supplier is not the total price that you end up paying — you’ll have extra fees to pay to receive the product and to fulfill the order. These expenses factor into your profit, because you can’t put them on the customer.
Imagine purchasing an item listed at $50 and seeing the total amount due at more than double because of extra fees? That will quickly send shoppers to your competitors. In some cases, it may even be illegal to apply the fees to customers. (This depends on the product and location.)
Sometimes net landed costs are calculated per item (this is more accurate), in other cases you might calculate it per batch. This means that sometimes your landed price will vary. Additionally, some of the associated fees may change. It’s normal for your total landed cost to fluctuate.
Tracking your total landed cost will help you stay profitable, especially because many of the associated expenses are hidden. For example, you may be applying the markup formula to products and wonder why you’re not making any money. If it’s not enough to cover the additional landed costs, then that’s why you’re not profiting.
What is included in total landed cost?
As mentioned, the net landed cost includes every expense you incurred in order to fulfill an order and get it into a customer’s hands. There are five main categories of your landed price:
Let’s take a deeper look at what’s included in the net landed cost for each of these categories:
The product is the most straightforward data point. This includes the unit price you paid to obtain the item from your supplier. The product price accounts for materials and components.
Shipping costs include crating, packing, handling, freight and transportation. You might have transportation fees for inland, ocean and air, depending on how you import and export your products.
Customs includes both the import and export of your products. If you purchase from a foreign supplier, you’ll have import fees. If you sell to customers in different countries, you’ll have export fees. Customs expenses include duties, taxes, tariffs, levies, value-added tax (VAT), brokerage fees, harbor fees and other regulatory fees.
Risk includes whatever you’re paying to protect your business, products and customers. That means expenses for insurance, compliance and quality assurance. This also includes whatever you have invested in safety stock.
Overhead pertains to things like purchasing staff, due diligence, travel, exchange rates/currency conversion, payment processing fees, carrying costs, purchasing agency commissions, corporate income tax and bank charges.
How to calculate cost of imported goods with the landed cost calculation formula
You can use the landed cost calculation formula to learn how to calculate the cost of imported goods. First, let’s start with the net landed cost formula:
Landed cost = product + shipping + customs + risk + overhead
To calculate landed cost, you’ll find the sum of the expenses associated with the product, shipping, customs, risk and overhead, as defined above. That number is your total landed cost.
Look for an inventory management software that can automate the net landed cost formula calculations. Doing this manually on a consistent basis will be painstakingly slow and tedious, especially if you have many SKUs.
It’s also important to be as accurate as possible, and leveraging technology automations can ensure that. If you calculate net landed cost to be too high, you could price customers out of purchasing your products. If you go too low, you could cut into your profits.
Here are some additional resources and tools for calculating the cost of imported goods:
- International shipping calculator
- Duty and tax calculator Shopify app
- Duty calculator
- Currency calculator
- Mastering Retail Math for Increased Inventory Control
- Online VAT calculator
Example for how to calculate the cost of imported goods
Let’s take a look at a landed cost calculation in action: Hypothetically, your business, which is located in the U.S., sells backpacks.
You purchase 250 backpacks from a supplier located in Country X at $10 per unit, for a total of $2,500. The duty is 2 percent, and freight for the entire shipment is $500. You pay $100 for insurance on the shipment, as well as $5 per package you send to each customer (let’s assume there is unit for every order — you can see where this calculation gets tricky). Every transaction was handled in USD, but you also pay a $2 payment processing fee per unit.
Here’s how you would use the net landed cost formula to calculate the cost of imported goods:
Shipping: $500 for the shipment of 250 units, or $2/unit
Customs: 2 percent, which is $50, or $0.20/unit
Risk: $5/unit + $100 total for 250 units which is $0.40/unit, for a total $5.40/unit
Landed cost = $10 + $2 + $0.20 + $5.40 + $2 = $19.60.
In this example, you need to sell each backpack for $19.60 to break even, and mark it up even more than that if you want to generate a profit.
Landed cost analysis: How to reduce your expenses and increase profits
While marking up prices is one way to reduce your total landed costs, a landed cost analysis can help you uncover additional opportunities that could potentially make an even bigger impact — without putting the burden on your customers.
One of the most effective ways to use a landed cost analysis to reduce expenses is to audit your supply chain partners. Remember, the lowest price doesn’t always translate into the biggest profit.
Unexpected fees could raise your total landed cost. Price compare different manufacturers, suppliers, 3PLs, shippers, etc. and research the TRUE net landed cost to determine which is the best fit for your growing business. You could also try to negotiate better rates and package with your existing partners.
Understanding the various metrics in your business is the best way to stay data-driven and make sure you’re turning a true profit. Inventory management software like Stitch Labs can integrate with various technologies throughout your supply chain to automate the total landed cost calculation for you.
Learn more about Stitch Labs inventory management software >