Landed cost is a significant term for companies that are involved in importing business. Those businesses need to maintain small costs to ensure their profitability in the industry. The companies that don’t pay attention to low costs or expenses don’t make profits as compared to the businesses that keep track of every little cost.
The costs like freight costs and duty costs are the costs that should be included in the value of the final product. Calculating this cost and based on that cost estimating the selling price of the product is quite tricky and causes an abundance of extra work for you. However, calculating this cost using technology can reduce your work and can also increase the accuracy of the calculation. Various websites on the Internet offer software that can be used to calculate the landed cost.
In this article, you will learn about what is landed cost, why it is the landed cost vital for a business, and formula to calculate the landed cost.
Definition of landed cost
Landed cost can be defined as the total cost of shipment that includes the purchasing price of the products, freight insurance, taxes, customs duties and all other types of expenses that occurred during the delivery of products to the final destination.
Landed Cost Meaning
The landed cost is the total cost that is incurred in the purchase and shipment of a product. Different types of expenses occur during the delivery of a product. The profit margin on the sale of the product reduces if these costs are not calculated correctly.
For example, if you are importing a product, then there will be costs like customs costs, transportation fees, transit insurance, purchase price of the product, currency conversion expenses, taxes, tariffs, duties, crating, handling, and payment fees, etc. All of these costs are associated with the price of received goods. Considering all of these costs helps in the calculation of the accurate sales price of goods and to calculate the profit margin on the products.
Importance of Calculating Landed cost
There are several costs associated with a product that is sold to a customer. Sometimes, these costs are so insignificant that even the smartest businessman might miss them. But having the clarity of landed cost gives you hold on your business. You learn how much you are spending on buying your products. Having this knowledge helps you decide the right selling price for your products. The correct selling price of products improves your profit margin.
Moreover, you get an exact idea of how much you are spending on your inventory. Thus, you can plan your sales and marketing strategies to boost your sales. You can improvise your supply chain and can determine the places where you can cut costs to decrease your landed cost.
In addition to this, if you know the exact landed cost, then you can determine whether your business will be profitable for you not and can learn about the efficiency of your business model. But the landed cost can be calculated correctly, only if you know all costs (even the smallest costs) related to your product.
Lack of experience and lack of proper tools can also become one of the reasons in calculating the correct landed cost incurred on a product, and it can be challenging to determine the right landed cost if you are not aware of all the expenses incurred in the shipment of your product.
Besides this, if you calculate your landed cost too high, then it might affect your sales because of the high selling price of your product and on the other hand, if you estimate your landed cost too low, then your profit margin will get affected. In the next section, you will learn about the formula to calculate the landed cost incurred in your business.
The formula for calculating Landed Cost
A landed cost is the sum of all the expenses incurred in the shipment of a product. The following is the formula for calculating the landed cost incurred in the business.
Landed cost = Currency conversion + Insurance + storage + regulatory fees + Handling fees + Payment processing + Custom duties + shipping costs + Taxes + Return Management
To calculate the landed cost, you are required to determine all the costs incurred during the shipment of the product and are added together. However, there are a few costs that are the same for all types of businesses, like shipping costs and insurance.
But there are some costs which are associated with the shipment of some types of products and not associated with other products. Therefore, it is necessary to calculate all the associated costs to calculate accurate landed cost.
Let us learn about different types o costs considered in the calculation of landed costs. Knowing their nature, you can determine whether these are associated with the shipment of your products or not.
Different types of costs included in Landed Cost
1. Shipping costs
Shipping cost is one of the main expenses associated with the landed cost of a product. It is the cost of shipping products from the supplier to your doorstep. The cost of shipping increases with the speed of shipping. That means if you want your goods to reach you fast, you are required to pay more.
Taxes are also one of the main costs included in the landed costs of a product. Every country has different rules for taxes. Some states have favorable tax policies whereas some have stringent tax policies. In addition to across the border taxes, you are required to pay domestic taxes also and these taxes vary based on the type of goods you are dealing with.
3 Custom duties
Customs duties are a kind of tax that is applied to the import and export of goods. Some states have fixed custom duty rates and sometimes these are decided on ad valorem basis i.e. the price of customs duty is determined depending on the value of goods.
Customers should fill a commercial invoice, which is primary custom documentation when they are shipping products from across the borders.
4. Storage fees
You are required to pay storage fees when you are importing goods internationally. This fee is charged on container shipment when it is left in transit more than the allotted free time.
Insurance is a monetary cover that you take to deal with unwanted events. Your insurance will help you cover your cost if your goods go missing. However, the cost of insurance cover plays an essential role in deciding the duty levied on the goods.
6. Return management
Return management is the control of the cost incurred when an international customer returns your product. It is quite common for companies to overlook the cost of return. But it can increase your landed cost. Therefore, make sure to get free return shipping to reduce your cost.