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Calculate Landed Cost

 

How To Calculate Landed Cost For Your eCommerce Business?

eCommerce businesses operate across supply and demand points spanning the world. This allows them to consider manufacturing or sourcing products from anywhere in the world. Accordingly, many eCommerce businesses often establish their production activities in or source products from low-labor cost countries to take the benefit of lowering their operating expenses.

Unfortunately, when selecting countries where they need to produce or source their products from, they only consider the direct purchasing costs. These eCommerce businesses fail to take into consideration a host of other hidden costs within the supply chain that they have to incur when producing or sourcing products overseas. These costs include international transportation costs, inventory holding costs, insurance, logistics lead time, import taxes, and so on.

As per research, the additional costs that eCommerce businesses have to bear offset the savings that may be generated by producing or sourcing products from low-cost countries. Thus, overlooking these costs when selecting a low-cost country for manufacturing or sourcing products may not reduce the overall costs for your business.

Apart from bearing labor costs and the hidden costs within the supply chain, eCommerce businesses also expose themselves to certain risks and factors that are beyond their control when they go global for either manufacturing or sourcing their products.

Say, for instance, we consider that the labor costs are likely to increase in many developing countries as one of the assumptions regarding the uncertainties attached to producing in or sourcing from developing countries. If this uncertainty becomes true, then our initial belief that production in or sourcing from low-labor cost countries is false.

This suggests that e-commerce businesses should consider not just the labor cost but the other hidden costs within the supply chain when selecting a country for producing or sourcing products. They should shift their focus from considering low labor cost (LLC) to total landed cost (TLC) and cost of risk implications instead.

What is the total landed cost? How to calculate the landed cost for your eCommerce business? Why landed cost is important for eCommerce businesses? And how can you improve landed cost? We will answer all these questions in this article.

Alan Chen Freecashflow.io

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Total Landed Cost Definition

Total Landed Cost (TLC) is the sum of all costs that are associated with producing or procuring commodities or products and delivering such products to the point where they produce revenue. It includes all costs that you as an eCommerce business incur to procure or produce the commodity or product and transport it from the supplier to the buyer.

Accordingly, the TLC includes not only material pricing, labor cost, and overhead, but also packaging, freight, import duty, customs clearance fees, taxes, insurance, inventory holding, currency conversion, and so on. This means that TLC captures both nominal and hidden costs within the supply chain from end to end corresponding to each sourcing activity.

Note that as an eCommerce business, to manage costs, different teams take responsibility for managing different costs. For instance, the procurement team may focus on negotiating with suppliers to reduce product-related costs like materials, packaging, qualification of materials and suppliers, etc. Then, the team responsible for logistics may work with service providers to reduce transportation costs and customs fees. Furthermore, the inventory-management team may focus on reducing inventory to ensure excessive inventory does not pile up.

However, to understand and manage TLC, you must undertake a comprehensive total landed cost analysis and use it as guidance for the various teams working as a part of your eCommerce business.

Note that the TLC model is a way to take more control over the savings as it helps you to map all the costs and makes it easier for you as an eCommerce business to see which costs can be reduced. How? Well, the TLC model divides costs into different categories, thus helping you to understand the whole cost situation of the supply chain of your eCommerce business. You can visualize various costs and highlight the important cost drivers of your business. This way, you can optimize costs by lowering them.

When you as an eCommerce business achieve transparency in TLC, you can assess other categories of cost, like different costs of suppliers. Thus, you as an eCommerce business can recognize and manage the overall cost situation of your business by beginning with assessing the overall costs and then individually assessing the cost drivers existing in the whole supply chain of your eCommerce business.

This way, the TLC model can help you to visualize the differences between two suppliers and the different advantages of each supplier.

Thus, to secure cost savings and source products from different low-cost suppliers, you need to have a total landed cost model in place.

Read: 16 E-Commerce Expenses And How To Reduce Them 

What Are The Major Components Of Total Landed Cost?

The factors of the landed cost include transportation costs, import taxes and duties, currency fluctuations, insurance, and packaging.

1. Logistics Or Transportation Costs

The geographic distances of the products sent across countries in a global supply chain are longer. This implies higher transportation costs in general. Additionally, it poses challenges in forecasting the lead times and demands due to the complexity of the supply chain.

This implies that as an eCommerce business supplying products globally, you may have to tie up a huge amount of capital in inventory. Investing capital in inventory for a long period negatively impacts the net working capital.

On the other hand, international suppliers face logistical challenges in terms of distances, times, demand volatility, inventory requirements, and customs barriers.

However, over recent years, shipments have begun to be more frequent, all thanks to evolving technology and improved logistics. These developments have made the shipments accurate and have led to lower inventory levels in some cases.

Since the suppliers and the business owners demanding inventory are sitting miles apart in a global supply chain, more frequent deliveries are required when businesses want to source globally. They need inventory due to uncertainties attached to transportation and distance of shipment in the global supply chain.

Time is one of the most important variables about deliveries and all the entities within a supply chain need to follow the agreed delivery times.

Thus, as an eCommerce business sourcing products globally, you must decide which Incoterm to use for transportation. Incoterms stands for International Commercial Terms. These are a set of standardized trade terms published by the International Chamber of Commerce (ICC). Such terms are widely used in international commercial transactions to define the responsibilities and obligations of buyers and sellers regarding the delivery, transportation, and risk of goods during the shipping process.

Some of the common incoterms used as guidelines for handling shipments between sellers and buyers in different countries are as follows.

Common Incoterms Defined

1. Ex Works (EXW)

“Ex Works” (EXW) is an incoterm that specifies the point at which the seller’s responsibility for the goods ends and the buyer assumes control. In an Ex Works agreement, the sellers fulfill their obligation by making the goods available for pick-up at their premises or another named place (such as a factory or warehouse). The buyer is responsible for all costs and risks associated with transporting the goods from the seller’s location to the final destination.

Note that EXW can be used for any mode of transportation, including sea, air, road, or rail.

2. Free Carrier (FCA)

“Free Carrier” means that the seller is responsible for delivering the goods to a named place, usually a carrier or another party nominated by the buyer, at the seller’s premises or another agreed-upon location. The parties must specify as clearly as possible the point within the named place of delivery, as the risk transfers from the seller to the buyer at the named place of delivery. Any loss or damage that occurs after this point becomes the buyer’s responsibility.

Note that FCA can be used for any mode of transportation, including sea, air, road, or rail.

3. Carriage And Insurance Paid To (CIP)

“Carriage and Insurance Paid To” means that the seller is responsible for delivering the goods to the carrier or another person at an agreed place. The seller is the one who nominates the carrier or another person and it is the seller who pays the costs of carriage necessary to bring the goods to the named place of destination.

Furthermore, the seller also contracts for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage. Note that under CIP, the seller is required to obtain insurance only on minimum cover. In case buyers want more insurance protection, they will either have to make their arrangements for the extra coverage or will need to express their concern to the seller and agree on the terms.

Note that CIP can be used for any mode of transportation, including sea, air, road, or rail.

4. Delivered At Place (DAP)

“Delivered at Place” is an incoterm that means that the sellers are responsible for delivering the goods to a named place of destination, and they bear all risks and costs until the goods are ready for unloading at the agreed-upon destination.

This means that the seller is responsible for delivering the goods to a named place, typically a destination specified in the contract. This could be a specific location or a point where the goods are handed over to a carrier or another party for further transportation. Furthermore, it is the seller who is responsible for transportation costs, including the main carriage, up to the named place of destination.

However, at the named place of destination, the risk is transferred from the seller to the buyer. That is, any loss or damage that occurs after this point becomes the buyer’s responsibility. Furthermore, the buyer is responsible for customs clearance, import duties, and other formalities required to bring the goods into their country.

Unlike some other incoterms, DAP does not obligate the seller to unload the goods. The buyer is typically responsible for unloading unless otherwise agreed.

Furthermore, DAP can be used for any mode of transportation, including sea, air, road, or rail.

5. Delivered At Place Unloaded (DPU)

“Delivered At Place Unloaded” (DPU) is an incoterm that means that the seller is responsible for delivering the goods to a named place of destination and unloading them at that location. This term is designed to cover the entire transportation process until the goods are unloaded at the agreed-upon destination.

Unlike some other incoterms, DPU places the responsibility for unloading the goods on the seller. The seller is responsible for not only transporting the goods to the named place but also for unloading them at that location.

The risk is transferred from the seller to the buyer at the named place of destination. This means that any loss or damage that occurs after unloading becomes the buyer’s responsibility.

Note that DPU can be used for any mode of transportation, including sea, air, road, or rail.

6. Delivered Duty Paid (DDP)

“Delivered Duty Paid” (DDP) is an incoterm that means that the seller is responsible for delivering the goods to the buyer’s premises or another named place in the buyer’s country. The seller bears all the risks and costs associated with transporting the goods, including customs duties, taxes, and other import-related expenses until the goods are delivered to the buyer.

Again, DDP can be used for any mode of transportation, including sea, air, road, or rail.

7. Free Alongside Ship (FAS)

“Free Alongside Ship” (FAS) is an incoterm that means that the seller is responsible for delivering the goods alongside a named vessel at a specified port. The goods are placed at the disposal of the buyer on the quay (dock) or alongside the ship. Furthermore, the seller bears the costs and risks associated with delivering the goods to that point, and the buyer takes over from that point onward.

FAS is typically used in maritime or waterway transport.

8. Free On Board (FOB)

“Free On Board” (FOB) is an incoterm which means that the seller is responsible for delivering the goods on board a named vessel at a specified port of shipment. The goods are considered delivered when they cross the ship’s rail, meaning they are placed on the ship. Furthermore, the seller bears the costs and risks associated with delivering the goods to that point, and the buyer takes over from that point onward.

Again, FOB is commonly used in maritime or waterway transport.

9. Cost and Freight (CFR)

“Cost and Freight” (CFR) is an incoterm which means that the seller is responsible for delivering the goods on board a vessel to the named port of destination. The goods are considered delivered when they reach the named port of destination. This is unlike the FOB, where the goods are considered delivered when they are placed on the ship.

Furthermore, in CFR, the seller covers the costs and risks associated with transporting the goods to that named port of destination, and the buyer takes over from that point onward.

Note that CFR is commonly used in maritime or waterway transport.

10. Cost, Insurance, and Freight (CIF)

“Cost, Insurance and Freight” is an incoterm which means that the seller is responsible for delivering the goods on board the vessel to the named port of destination. Furthermore, the seller must contract for and pay not only the costs and freight necessary to bring the goods to the named port of destination but he or she should also contract for insurance cover against the buyer’s risk of loss of or damage to the goods during the carriage.

The risk of loss of or damage to the goods passes when the goods are on board the vessel.

Note that under CIF, the seller is required to obtain insurance only on minimum cover. In case buyers want more insurance protection, they will either have to pay for the extra cover on their own or will have to expressly agree with the seller.

Now, as an eCommerce business wanting to source products globally, there are different Incoterms that you can use concerning transportation. These terms range from taking the entire risk of the transportation including planning the transportation to delegating the responsibility of transportation entirely to a third party.

Depending upon the incoterm you use for transportation, you will determine the cost of transportation and include such a cost in your Total Landed Cost.

Read: How To Reduce Overhead Cost For Your E-Commerce Business?

2. Customs Duty And Tariffs

Customs duties are the charges levied on goods when they cross international borders. Thus, as an eCommerce business, if you import products into your country, you will have to pay customs duties. These duties are fixed by the foreign customs authorities and are meant to protect local industries, economies, and businesses.

Tariffs are different from customs duties. While customs duties are the charges levied on all the goods being imported into a country, tariffs are the kind of duties levied on certain imports. It is an additional charge levied on selected goods being imported into a country. The objective behind levied tariffs in addition to the customs duty on certain imports is to discourage the imports of such goods into a country and to further protect the domestic economy.

Now, the kind of incoterms you choose as an eCommerce business with international suppliers or manufacturers will have a huge impact on the total landed cost of the products that you import. For instance, if as an eCommerce seller you choose Ex Works (EXW) when you purchase products from international suppliers or manufacturers at their dock, then you are responsible for paying the freight, the cargo insurance, and the clearing customs.

On the contrary, if you as an eCommerce business choose the Incoterm Delivered Duty Paid (DDP) with the international manufacturers or suppliers, the manufacturers or the suppliers will take care of everything including shipping, cargo, customs, etc. The disadvantage to DDP is that the international manufacturers or suppliers will take a premium as they are taking care of the logistics and fees for you.

Moreover, different countries levy different taxes and duties. Taxes are an important factor for you as an eCommerce business since tax affects the company’s results. To optimize the profit, you as an eCommerce business must strive to minimize the tax burden. Changes in tax rates affect your business.

However, the tax rates in countries cannot be the only factor in deciding whether you should locate your business or source products from such countries. Taxes and duties may become the deciding factor when countries are comparable in other ways. Thus, your sourcing decisions are affected by both tax and non-tax considerations.

Read: E-commerce Taxation 101: The Basics You Need to Know

3. Customs Brokerage

A customs brokerage fee is a charge levied by a customs broker for their services in facilitating the customs clearance process for imported goods. Customs brokers play a crucial role in helping you as an eCommerce importer navigate the complex regulatory requirements and documentation needed for international trade. The fee that they charge is compensation for the customs broker’s expertise and assistance in ensuring that goods comply with customs regulations and are smoothly cleared through customs authorities.

Note that the customs brokerage fees can have a significant impact on the landed cost of your imported goods. That’s because the landed cost represents the total cost incurred by you as an eCommerce importer to receive goods at your destination, including the cost of the goods, shipping, insurance, and any additional fees or charges such as customs duties and brokerage fees.

This fee can vary based on factors such as the complexity of customs documentation, the value and nature of the goods, and the services provided by the customs broker. As an eCommerce importer, you must be aware of the fee structure of the customs broker that you choose and factor these costs into your pricing strategy.

Remember, higher customs brokerage fees can not only reduce profit margins for you as an eCommerce importer, but it can also influence the competitiveness of your imported goods in the marketplace. Thus, as an eCommerce business, you need to manage these fees efficiently to stay competitive while ensuring compliance with customs regulations.

4. Currency Fluctuation

As an eCommerce business sourcing products through international suppliers, you have to make transactions in different currencies, depending upon where your suppliers are located. Currency fluctuations can have a significant impact on the landed cost of imported goods.

When you undertake transactions in foreign currencies, there is a possibility that you may generate gains or incur losses due to fluctuations in exchange rates between the transaction date and the settlement date. These gains and losses occur because the conversion rates change, thereby impacting the value of the transaction in your local currency.

As an eCommerce business undertaking transactions in foreign currencies, you must account for these gains and losses in your total landed cost.

5. Insurance

Insurance is a critical component of the total landed cost for your imported goods. As an eCommerce business, you have to decide whether to insure imported goods, and if yes, then how to insure those goods. This decision will depend upon the business strategy you use as an eCommerce importer.

When it comes to transporting the goods from the supplier, there are different ways of insuring the goods. It can be done by using an incoterm where the products automatically are insured or by getting a separate insurance.

Incoterms such as Cost, Insurance, and Freight (CIF) and Carriage and Insurance Paid To (CIP) include insurance as part of the supplier’s responsibilities. In these cases, your supplier is obligated to arrange and pay for insurance coverage. Thus, the cost of insurance is typically included in the total price that you pay as an eCommerce importer.

Then, in the case of incoterms like Free On Board (FOB) and Ex Works (EXW), the responsibility for insurance lies on you as an eCommerce importer.

Thus, depending on the chosen Incoterm, insurance costs may be included in the total price that you pay to the supplier or may be a separate cost that you may have to incur as an eCommerce importer. If your supplier is responsible for insurance, the cost is typically factored into the overall price of the goods. However, if you as an eCommerce importer are responsible, then you have to arrange and pay for insurance separately.

Note that the insurance costs or premiums depend on the value of the goods being shipped, the mode of transportation, the route, and the level of coverage required. The higher the value of the goods or the riskier the transportation route, the higher the insurance premium.

Thus, insurance costs do have an impact on the total landed cost of imported goods.

6. Inventory

Managing inventory is important for your eCommerce business from the point of view of cost reduction. You may have to store a huge amount of inventory as an eCommerce business. Thus, you need to optimize your inventory costs.

Inventory costs typically include two types of costs: inventory carrying costs and inventory holding costs. Carrying costs of inventory relate to the costs of maintaining and storing a certain quantity of goods within your warehouse over a specific period. These costs correspond to the costs that arise from capital getting tied up in inventory and costs associated with risks like obsolescence, shrinkage, etc. The inventory holding costs, on the other hand, are the costs of handling the inventory and storage together with the cost of insurance and management.

Taking these costs into consideration, the key decisions that you need to make as an eCommerce business when purchasing inventory include how much quantity of inventory you need to order and what is the frequency at which you are going to purchase products. Apart from this, another factor that you need to consider when purchasing inventory is the possible discount on the quantity of purchased goods.

Now, when making an inventory purchase decision, your objective should be to optimize the ordered quantity together with the sales price to maximize your business profit. That’s because the inventory costs play a significant role in determining the total landed cost of imported inventory.

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In addition to optimizing the purchase order quantities and the sales price, you need to think about the strategies that your eCommerce business must adopt to manage supply chain inventory. You can either adopt the Vendor Managed Inventory (VMI) strategy or the Retail Managed Inventory (RMI) to manage your supply chain inventory.

Vendor Managed Inventory (VMI) is a supply chain management practice in which your supplier takes an active role in managing and replenishing your inventory as an eCommerce seller. In a VMI arrangement, your supplier monitors your inventory levels, makes decisions about when to restock, and ensures that the right quantity of goods is available at your location. This approach aims to improve efficiency, reduce stockouts, and enhance collaboration between you as an eCommerce seller and your supplier. Furthermore, it may lead to lowering your inventory cost, better market response, and better flexibility considering distribution and planning.

The Retail Managed Inventory (RMI), on the other hand, is a supply chain management practice in which, you, the retailer, hold the inventory as you have better information regarding customer demand.

Benefits Of Landed Cost Tracking

Landed cost tracking offers several benefits for your eCommerce business. Here are some key advantages:

1. Accurate Product Cost

Landed cost plays a crucial role in determining the true product cost as it provides you with a comprehensive view of all costs associated with importing goods. The true product cost that landed cost generates goes beyond considering the initial purchase price and includes various expenses incurred throughout the supply chain like shipping, customs duties, taxes, and other associated costs.

Since landed cost includes all these additional costs, it provides you with a more accurate representation of the total expenses associated with acquiring the product.

Remember that by understanding all the costs involved in the product’s journey, you as an eCommerce business can anticipate and manage risks attached to sourcing products from international suppliers. Whether it’s currency fluctuations, regulatory changes, or supply chain disruptions, you as an eCommerce business can develop strategies to mitigate these risks and avoid cost escalations.

2. Transparent Cost Breakdown

By calculating the landed cost of imported goods, you as an eCommerce business can get a transparent view of all the direct and indirect costs associated with importing goods, right from the point of origin to the final destination. That’s because the total landed cost includes not only the cost of goods but also all relevant costs incurred during the entire supply chain process including shipping, customs duties, taxes, insurance, handling fees, and other expenses related to the importation and delivery of goods.

Such a transparent cost breakdown allows you as an eCommerce business to see the specific amounts allocated to different elements, thereby facilitating a clear understanding of how each factor contributes to the overall cost.

3. Maximize Profits

By giving you a transparent breakdown of all the costs involved in importing goods from the point of origin to the final destination, the landed cost tracking helps you to identify opportunities for cost reduction as an eCommerce seller and hence maximize profits. The opportunities for cost reduction may include streamlining logistics, optimizing transportation methods, and implementing efficient customs clearance processes, thereby helping you lower the overall cost of goods and maximizing profits.

Thus, landed cost tracking helps you to accurately monitor product performance against profitability targets and ensure estimated costs are in line with actual costs.

4. Informed Sourcing Decisions

Landed cost tracking plays a significant role in the supplier selection process as it provides you with comprehensive insights into the total cost of acquiring goods from different suppliers. By tracking landed costs, you as an importer can identify the key cost drivers associated with each supplier. This includes understanding which suppliers have more favorable shipping terms, lower customs duties, or efficient logistics, thus contributing to a better understanding of cost structures.

Since you have a clear understanding of all cost components, you can negotiate better terms with suppliers, explore discounts, and identify opportunities to reduce costs, contributing to improved profit margins.

5. Ensured Compliance

Landed cost tracking plays a very important role in helping you as an eCommerce business stay compliant with customs regulations. It:

  • ensures that you are accurately accounting for and paying the required tariffs and taxes associated with importing goods
  • necessitates you to maintain accurate and detailed documentation of all expenses incurred throughout the supply chain which is essential for compliance with customs and regulatory requirements
  • helps you to adapt to changes in international trade regulations and accordingly adjust your landed cost calculations to ensure ongoing compliance with new requirements and standards
  • allows you to assess the impact of rules of origin and preferential tariff rates offered by trade agreements on the total cost of imported goods and take advantage of cost-saving opportunities while complying with the terms of the agreements
  • helps you to comply with anti-dumping regulations by accurately assessing the total cost of imported goods thus avoiding potential legal issues
  • contributes to the accurate valuation of goods for customs purposes including correct determination of the transaction value, ensuring compliance with the World Trade Organization’s (WTO) Agreement on Customs Valuation
  • ensures that you comply with Importer Security Filing (ISF) requirements in the United States and similar programs in other countries by providing accurate and timely information about shipments to enhance supply chain security
  • helps you to avoid inadvertently violating trade sanctions by identifying the origin of goods and assessing whether any restrictions or prohibitions apply to the importing or exporting countries
  • ensures that you are aware of and comply with the unique customs procedures, import restrictions, and documentation requirements of each destination country

How To Calculate Landed Cost?

To start calculating the total landed cost, we first need to identify the various cost elements of the total cost. Let’s consider an example to understand how landed cost is calculated for imported goods.

Landed Cost Example

Say, for instance, we want to import Product 1, Product 2, Product 3, Product 4, and Product 5 from Australia into the USA. The following are the costs you incur to import the products from Australia to the USA.

A. Cost Of Goods

It represents the cost of goods purchased as showcased in the vendor invoice and is typically in the vendor’s currency, that is, in Australian Dollars (AUD). These vendor invoices may also showcase additional landed costs for freight and insurance depending on the purchase agreement.

FOB is the incoterm based on which the goods will be supplied by the Australian supplier to the destination port in the USA. As per the FOB incoterm, the goods will be considered delivered when they are placed on the ship. Accordingly, the seller bears the costs and risks associated with delivering the goods to that point.

B. Freight Charges

These are the transportation charges that the Australian Supplier will incur for transmitting products from the Port of Origin (Port of Melbourne in our case) to the Port Of Destination (Port Of Los Angeles) in AUD. In our example, the goods were transported by sea freight. The sea freight charges also include surcharges.

C. Customs Duties

Customs duties are the rate percentages of duties established for different product categories that you have to pay as an eCommerce importer in the USA. You need to use the Harmonized System Code (HSN) to determine the duty rates for the imported products. The HS code will help you determine the correct duty rates for the imported products.

The amount of duty that you need to pay as a US eCommerce importer will be nothing but the customs value, normally the purchase value of the goods, multiplied by the duty rate. This is the amount that you have to include in the total landed cost calculation.

D. Local Handling Charges

Local handling charges are the costs that you as an eCommerce importer have to incur at the port of destination (port of Los Angeles). These are the charges that are typically levied by shipping lines, airlines, or freight forwarders. Since we have imported goods through sea freight, these local handling charges may include port charges, delivery order fees, freight forwarder handling charges, etc.

E. Customs Clearance Charges

When goods clear customs, you may have to incur additional incidental charges for getting the goods cleared through the customs and delivering them to the destination. These charges would normally be in the currency of the destination country or region and would be charged by your customs broker or freight forwarder. These charges may include agency or brokerage fees.

F. Local Delivery Charges

The local delivery charges are the costs that you have to incur as an eCommerce importer at the port of destination (port of Los Angeles). These are the charges that your freight forwarder or your customs broker takes from you and are typically related to transporting the goods from the wharf.

The costs typically include the cost of transport, fuel surcharge fee, wharf booking fee, wharf infrastructure fee, trailer hire fee, waiting time, and road and rail transport tolls.

G. Finance And Insurance Costs

The insurance costs are the insurance premiums that you pay as an eCommerce importer for insuring goods during transportation. The insurance premiums are calculated based on the value of the goods being transported. They are usually a percentage of the total value of the goods and are determined by the type of insurance coverage you choose.

The finance costs, on the other hand, are the costs that you incur to finance your imported goods. Such costs may include fees paid to banks for providing finance for imported goods and foreign exchange fees.

Now, since we have defined all the cost elements of landed cost, let’s switch to landed cost calculation using the landed cost formula.

Landed Cost Formula

The following is the landed cost formula:

Landed Cost = Cost of Goods + Shipping and Freight Costs + Customs Duties and Taxes + Insurance Costs + Handling and Storage Fees + Additional Charges

Now, using all the cost elements of landed cost, let’s build a simple landed cost calculator.

Landed Cost Calculator

To create a Landed Cost Calculator, we need to create

  • Table I (Incoterms)
  • Table II (Extra Costs)
  • Product Details Table
  • Landed Cost Details Table
  • Percentage Margin Table
  • Profit/Loss Table

1. Table I (Incoterms)

This table showcases the following items:

1. Incoterm

FOB is the incoterm based on which the goods will be supplied by the Australian supplier to the destination port (Port of Los Angeles) in the USA. As per the FOB incoterm, the goods will be considered delivered when they are placed on the ship by the Australian Supplier. Accordingly, the Australian Supplier bears the costs and risks associated with delivering the goods to that point.

2. Buy Currency

The currency in which we have purchased goods from the Australian Supplier is AUD.

3. Local Currency

The Local Currency is USD since we are a US-based eCommerce seller.

4. Exchange Rate

The AUD to USD exchange rate as of today is 1 AUD = 0.65 USD.

Table I
Incoterm FOB
Buy Currency AUD
Supplier’s Sell Currency
Local Currency USD
Your Local Currency
Exchange Rate 0.65

2. Table II (Extra Costs)

These extra costs will be in the local currency, that is, in USD since we incur all these costs at the port of destination (Port of Los Angeles). This table showcases the following items:

1. Seafreight

As the table already mentions, the sea freight includes the sea freight charges, local import charges, customs clearance fees, trucking charges, etc. However, it does not include import duty and taxes. In our example, the total sea freight charges are USD 800.

2. Total Import Costs

We have total import costs worth USD 2,200. The Total Import Costs include local port handling charges, customs clearance fees, documentation, marine insurance, trucking, etc.

3. Import Tax

Confirm and enter the Import Tax. This rate applies to all the products that we want to import. In our example, the Import Tax is 10%.

4. Total Extra Costs

The Total Extra Costs mean the costs that are beyond the purchase price of the products. Thus, to calculate the total Extra Charges, we will add Seafreight and Total Import Costs (Extra Costs = Seafreight + Total Import Costs). This amount turns out to be USD 3,000.

Table II
“EXTRA COSTS” “Extra Costs” is the total of all sea freight + local import charges, customs clearance, trucking, etc (not including import duty and taxes)
Must be your Local Currency
Seafreight $ 800.00 USD
Total Import Costs $ 2,200.00 USD Import Tax  10 %
Total Extra Costs $ 3,000.00 USD

3. Product Details Table

This table showcases the following items:

1. Product Code/Description

In this column, you will either mention the Product Code or product Description. This is done to list the products that we have imported from the Australian supplier.

2. Duty Rate

Using the product’s HS Code, you need to determine the percentage import duty rate per product and provide each of the rates in the Duty Rate column. The duty rates for each of the products are as follows:

  • Product 1: 5%
  • Product 2: 2.5%
  • Product 3: 5%
  • Product 4: 7.5%
  • Product 5: 7.5%

3. Unit

In our example, the unit of measurement for the products to be imported is each item itself.

4. Buy Price

The Buy Price is the price at which we have purchased each of the products from the Australian supplier. Note that the currency is AUD, that is, the currency of the place of origin. The Buy Price of each of the imported products is as follows:

  • Product 1: AU$ 122.50
  • Product 2: AU$ 95.30
  • Product 3: AU$ 109.55
  • Product 4: AU$ 55.80
  • Product 5: AU$ 27.90

5. Quantity

The quantity represents the number of items that we have ordered for each of the imported products. The quantity ordered for each of the imported products is as follows:

  • Product 1: 120 Items
  • Product 2: 150 Items
  • Product 3: 200 Items
  • Product 4: 220 Items
  • Product 5: 80 items

6. Weight (kg)

Weight represents the weight of each product in kg. The weight in kgs for each of the imported products is as follows:

  • Product 1: 19 kg
  • Product 2: 25.8 kg
  • Product 3: 14 kg
  • Product 4: 9 kg
  • Product 5: 13 kg

7. Weight (Total)

Weight (Total) represents the total weight of all the items imported for each of the products. This is calculated by multiplying the Total Quantity (number of items) of each product by the weight of a single item of each of the products. (Weight (Total) = Quantity x Weight (kg)). Accordingly, the weight (total) in kgs for each of the imported products is as follows:

  • Product 1: 120 x 19 = 2280 kg
  • Product 2: 150 x 25.8 = 3870 kg
  • Product 3: 200 x 14 = 2800 kg
  • Product 4: 220 x 9 = 1980 kg
  • Product 5: 80 x 13 = 1040 kg

8. Cubic (M3)

This column represents the weight of each of the imported products in cubic meters. We need to calculate this to apportion the extra costs among each of the products. Since, 1 kg = 1/1000 cubic meters, the weight in cubic meters for each of the imported products is as follows:

  • Product 1: 19 x 0.001 = 0.019 m3
  • Product 2: 25.8 x 0.001 = 0.0258 m3
  • Product 3: 14 x 0.001 = 0.014 m3
  • Product 4: 9 x 0.001 = 0.009 m3
  • Product 5: 13 x 0.001 = 0.013 m3

9. Cubic Total

The Cubic Total column represents the sum total of the weight of each of the imported products multiplied by the number of items imported for each of the products. Accordingly, the total weight of the total number of items of each of the imported products in cubic meters is as follows:

  • Product 1: 120 x 0.019 = 2.28 m3
  • Product 2: 150 x 0.0258 = 3.87 m3
  • Product 3: 200 x 0.014 = 2.8 m3
  • Product 4: 220 x 0.009 = 1.98 m3
  • Product 5: 80 x 0.013 = 1.04 m3
Enter Product Details
CODE / DESC. DUTY RATE (%) Unit Buy Price

(AUD)

Qty Weight (Kg) Weight Total Cubic (M3) Cubic Total
Product 1 5 EACH $ 122.50 120 19 2280 0.019 2.28
Product 2 2.5 EACH $ 95.30 150 25.8 3870 0.0258 3.87
Product 3 5 EACH $ 109.55 200 14 2800 0.014 2.8
Product 4 7.5 EACH $ 55.80 220 9 1980 0.009 1.98
Product 5 7.5 EACH $ 27.90 80 13 1040 0.013 1.04
TOTALS 11970 KGS 11.97

4. Landed Cost Details Table

This table showcases the following items:

1. Product Code/Description

You will either mention the Product Code or product Description. This is done to list the products that we have imported from the Australian supplier.

2. Buy Price (AUD)

This column represents the price of each of the products that we have imported from the Australian supplier in AUD currency. Accordingly, the buy price in AUD for each of the products is as follows:

  • Product 1: AU$ 122.50
  • Product 2: AU$ 95.30
  • Product 3: AU$ 109.55
  • Product 4: AU$ 55.80
  • Product 5: AU$ 27.90

3. Buy Price (USD)

This column represents the price of each of the products that we have imported from the Australian supplier in USD currency. We have to convert the buy price into local currency. Accordingly, the buy price in USD for each of the products as per 1 AUD = 0.65 USD exchange rate is as follows:

  • Product 1: US$ 79.625
  • Product 2: US$ 61.945
  • Product 3: US$ 71.2075
  • Product 4: US$ 36.27
  • Product 5: US$ 18.135

4. Extra Costs

This column represents the amount of extra costs in USD that are apportioned to each of the imported products. The extra costs apportioned to each of the products will be according to the formula (Total Extra Costs/Cubic m3 Total) x Cubic m3 Weight of Each Product. Accordingly, the extra costs apportioned to eah of the products are as follows:

  • Product 1: (USD 3,000/11.97) x 0.019 = USD 4.76
  • Product 2: (USD 3,000/11.97) x 0.0258 = USD 6.47
  • Product 3: (USD 3,000/11.97) x 0.014 = USD 3.51
  • Product 4: (USD 3,000/11.97) x 0.009 = USD 2.26
  • Product 5: (USD 3,000/11.97) x 0.013 = USD 3.26

5. Duty Amount

This column represents the amount of import duty that is charged on each of the imported products at the port of destination (Port of Los Angeles). It is calculated by multiplying the rate of import duty with the t. Accordingly, the extra costs apportioned to eah of the products are as follows:

  • Product 1: (5/100) x USD 79.625 = USD 3.98125
  • Product 2: (2.5/100) x USD 61.945 = USD 1.548625
  • Product 3: (5/100) x USD 71.2075 = USD 3.560375
  • Product 4: (7.5/100) x USD 36.27 = USD 2.72025
  • Product 5: (7.5/100) x USD 18.135 = USD 1.360125

6. Landed Cost

This column represents the estimated landed cost. The estimated landed cost is calculated by adding the buy price (USD), extra costs (USD), and the duty amount (USD). Accordingly, the estimated landed costs for each of the imported products are as follows:

  • Product 1: US$ 79.625 +US$ 4.76 + US$ 3.98125 = US$ 88.36625
  • Product 2: US$ 61.945 + US$ 6.47 + US$ 1.548625 = US$ 69.963625
  • Product 3: US$ 71.2075 + US$ 3.51 + US$ 3.560375 = US$ 78.277875
  • Product 4: US$ 36.27 + US$ 2.26 + US$ 2.72025 = US$ 41.25025
  • Product 5: US$ 18.135 + US$ 3.26 + US$ 1.360125 = US$ 22.755125

7. Tax

This column represents the import tax that is levied on all the products imported. The import tax is levied at the rate of 10%. This is charged on the total landed cost of the products. Accordingly, the import tax for each of the imported products is as follows:

  • Product 1: (10/100) x US$ 88.36625 = US$ 8.836625
  • Product 2: (10/100) x US$ 69.963625 = US$ 6.9963625
  • Product 3: (10/100) x US$ 78.277875 = US$ 7.8277875
  • Product 4: (10/100) x US$ 41.25025 = US$ 4.125025
  • Product 5: (10/100) x US$ 22.755125 = US$ 2.2755125

8. Landed Cost Total

This column represents the product of the estimated landed cost of one item of each product and the total quantity of items of each of the products imported. Accordingly, the landed cost total of each of the imported products is as follows:

  • Product 1: US$ 88.36625 x 120 = US$ 10,603.95
  • Product 2: US$ 69.963625 x 150 = US$ 10,494.54375
  • Product 3: US$ 78.277875 x 200 = US$ 15,655.575
  • Product 4: US$41.25025 x 220 = US$ 9,075.055
  • Product 5: US$ 22.755125 x 80 = US$ 1,820.41

9. Total Tax

This column represents the total import tax which is nothing but the product of import tax on a single item of each of the imported products and the number of items imported for each of the products. Accordingly, the total tax of each of the imported products is as follows:

  • Product 1: US$ 8.836625 x 120 = US$ 1,060.395
  • Product 2: US$ 6.9963625 x 150 = US$ 1,049.454375
  • Product 3: US$ 7.8277875 x 200 = US$ 1,565.5575
  • Product 4: US$ 4.125025 x 220 = US$ 907.5055
  • Product 5: US$ 2.2755125 x 80 = US$ 182.041
Landed Cost Details
Code / Desc. Buy Price

(AUD)

Buy Price

(USD)

Extra Costs Duty Amount Landed Cost (Ex) Unit Tax Qty Landed Total Tax Total
Product 1 $ 122.50 $ 79.625 $ 4.76 $ 3.98125 $ 88.36625 Each $ 8.836625 120 $ 10,603.95 $ 1,060.395
Product 2 $ 95.30 $ 61.945 $ 6.47 $ 1.548625 $ 69.963625 Each $ 6.9963625 150 $ 10,494.544 $ 1,049.454
Product 3 $ 109.55 $ 71.2075 $ 3.51 $ 3.560375 $ 78.277875 Each $ 7.8277875 200 $ 15,655.575 $ 1,565.5575
Product 4 $ 55.80 $ 36.27 $ 2.26 $ 2.72025 $41.25025 Each $ 4.125025 220 $ 9,075.055 $ 907.5055
Product 5 $ 27.90 $ 18.135 $ 3.26 $ 1.360125 $ 22.755125 Each $ 2.2755125 80 $ 1,820.41 $ 182.041
TOTALS $ 47,649.534 $ 4,764.953

5. Percentage Margin Table

This table showcases the margin percentages that we want to earn on each of the products if we sell them in the market. These percentages will be applied to the estimated landed cost of each of the items of the imported products to calculate the selling price and the estimated amount of profit that we can earn on each of the products.

The following table showcases the margin in percentages that we want to earn on Product 1, Product 2, Product 3, Product 4, and Product 5.

Code / Desc. Margin %
Product 1 10 %
Product 2 15 %
Product 3 20 %
Product 4 10 %
Product 5 15 %

6. Profit/Loss Table

This table showcases the selling prices as well as the per unit profit that we may earn if we take into consideration the margin percentages as described in the above table.

Let’s first calculate the per unit selling price of each of the imported products. It is calculated by dividing the ex-tax landed cost of each unit of the imported products by the difference between 100 and the percentage margin defined for each of the products (Note that we have used the applied margin percentage on the selling price. Since we do not have the selling price, we consider it as x. Using the unitary method, we can calculate x (selling price) as = landed cost/(100-percentage margin)). Accordingly, the per unit selling price of each of the imported products is as follows:

  • Product 1: $ 88.36625/(100%-10%) = $ 88.36625/90% = $ 88.36625/0.90 = $98.185
  • Product 2: $ 69.963625/(100%-15%) = $ 69.963625/85% = $ 69.963625/0.85 = $ 82.310
  • Product 3: $ 78.277875/(100%-20%) = $ 78.277875/80% = $ 78.277875/0.80 = $ 97.847
  • Product 4: $41.25025/(100%-10%) = $41.25025/90% = $41.25025/0.90 = $ 45.834
  • Product 5: $ 22.755125/(100%-15%) = $ 22.755125/85% = $ 22.755125/0.85 = $ 26.771

Now, let’s calculate the total selling price. This is calculated by multiplying the per unit selling price by the number of units of each of the imported products. Accordingly, the total selling price of each of the imported products is as follows:

  • Product 1: US$ 98.185 x 120 = US$ 11,782.2
  • Product 2: US$ 82.310 x 150 = US$ 12,346.5
  • Product 3: US$ 97.847 x 200 = US$ 19,569.4
  • Product 4: US$ 45.834 x 220 = US$ 10,083.48
  • Product 5: US$ 26.771 x 80 = US$ 2,141.68

Next, we need to calculate the per-unit profit. This is calculated by subtracting the per unit estimated landed cost from the per unit selling price of each of the imported products. Accordingly, the per unit profit of each of the imported products is as follows:

  • Product 1: US$ 98.185 – US$ 88.3662 = US$ 9.819
  • Product 2: US$ 82.310 – US$ 69.963625 = US$ 12.346
  • Product 3: US$ 97.847 – US$ 78.277875 = US$ 19.569
  • Product 4: US$ 45.834 – US$41.25025 = US$ 4.584
  • Product 5: US$ 26.771 – US$ 22.755125 = US$ 4.016

Finally, we need to calculate the total profit that we earn from all the units of each of the imported products. This is calculated by multiplying the per unit profit earned from each of the imported products by the units of each of the imported products. Accordingly, the total profit of each of the imported products is as follows:

  • Product 1: US$ 9.819 x 120 = US$ 1,178.28
  • Product 2: US$ 12.346 x 150 = US$ 1,851.9
  • Product 3: US$ 19.569 x 200 = US$ 3,913.8
  • Product 4: US$ 4.584 x 220 = US$ 1,008.48
  • Product 5: US$ 4.016 x 80 = US$ 321.28
Code / Desc. Landed Cost (Ex) Unit Margin Qty Sell / Unit (Ex Tax) Sell / Unit Ttl (Ex Tax) Profit / Unit Profit Ttl
Product 1 $ 88.36625 EACH 10% 120 $98.185 $ 11,782.2 $ 9.819 $ 1,178.28
Product 2 $ 69.963625 EACH 15% 150 $ 82.310 $ 12,346.5 $ 12.346 $ 1,851.9
Product 3 $ 78.277875 EACH 20% 200 $ 97.847 $ 19,569.4 $ 19.569 $ 3,913.8
Product 4 $41.25025 EACH 10% 220 $ 45.834 $ 10,083.48 $ 4.584 $ 1,008.48
Product 5 $ 22.755125 EACH 15% 80 $ 26.771 $ 2,141.68 $ 4.016 $ 321.28
TOTALS $ 55,923.26 $ 8,273.74

Why Landed Cost Is Important For eCommerce Businesses?

The primary reason why it is important to calculate landed costs as an eCommerce business is to determine the actual and hidden costs of importing goods throughout the supply chain.

In addition to the purchase price of the products that you pay to the suppliers, there are some extra costs that you have to incur as an importer to import the goods from the port of origin to the port of destination. These costs include taxes, insurance, customs brokerage, freight, customs duties, local handling charges, and more.

Once you determine every cost element, you can make better decisions regarding how to get the products to the end consumers in the most cost-efficient way.

Say, for instance, there are multiple suppliers spanning across different countries who supply the products that you want to import. If you choose a supplier based on only the price of the products that each of the suppliers offers, you will end up making a wrong decision. You may realize eventually that choosing a supplier based on only the purchase price of the products is making you pay more for the products. That’s because you did not consider the hidden costs of importing the goods from international suppliers when selecting a supplier. You just considered the direct purchase price of the products.

When you estimate every element of the cost involved in importing the goods, your decision-making gets enhanced. You can visualize the actual expenses involved in importing the goods. Moreover, such a transparent breakdown of costs helps you to optimize the cost elements that are making your imports expensive.

Say, for instance, if your estimated landed cost calculation shows that the sea freight from a particular trade route is high, then you will find other routes through which you can import the goods. You may even calculate estimated air freight and compare it with the current sea freight to understand which transport mode is better.

Thus, an eCommerce business needs to calculate total landed cost because it:

  • gives a transparent breakdown of all the cost components
  • sets accurate and competitive prices for products
  • ensures thorough profitability analyses for each product
  • helps to make informed decisions when selecting suppliers and sourcing products
  • helps to allocate resources strategically, plan for potential fluctuations in costs, and make informed decisions that contribute to financial stability
  • helps to optimize inventory by helping to determine optimal order quantities, setting reorder points, and managing safety stock levels to prevent overstocking or stockouts, ultimately reducing carrying costs
  • assess and manage risks associated with international trade including understanding the impact of currency fluctuations, changes in customs regulations, and other factors that may affect costs
  • helps to make strategic decisions as it supports negotiations with suppliers, helps in choosing cost-effective shipping methods, and informs decisions related to the supply chain, contributing to overall operational efficiency
  • ensures compliance with customs regulations, import duties, and taxes

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