What Is Landed Cost? And How To Calculate and Manage It
Are you finding it challenging to manage your business expenses effectively? You might have heard of the terms ‘Landed Cost,’ ‘Total Landed Cost,’ or ‘Total Delivered Cost.’ These are vital concepts in supply chain management, helping businesses to understand the actual cost of delivering products to the market. This article will help you understand what landed cost is, its importance, how to calculate it, and manage it effectively.
What is Landed Cost?
Landed cost, Total Landed Cost (TLC), or Total Delivered Cost refer to the complete sum of all costs associated with producing and delivering products to a point where they generate revenue. Several elements contribute to your landed costs, including capital, unit costs, transportation expenses, taxes and tariffs, and inventory management costs. Moreover, factors such as corporate income tax, currency exchange rates, brokerage fees, and the extent of your carbon footprint play a part.
Landed cost typically includes the cost of goods sold, shipping fees, customs duties, import taxes, insurance, and any other costs up to the point of receiving the goods. However, the cost to the customer (the price you sell the goods for) and local sales taxes are not included in the landed cost.
Why is Landed Cost Important?
The primary purpose of calculating landed cost is to identify both evident and hidden fees during your supply chain. Understanding the true cost of a product can enhance your decision-making regarding the most cost-efficient method of product delivery.
For example, if a product is manufactured in several different countries, focusing solely on the cheapest net purchasing cost may lead to overspending. It is crucial to evaluate transportation cost, taxes, tariffs, customs, and other potentially hidden costs. This complete understanding of your products’ total cost facilitates better decision-making, improving economic performance by revealing the actual product expenses and uncovering opportunities for cost optimization.
Without calculating your landed cost, you risk making decisions based on incomplete data, which may impact profitability.
Why is Landed Cost Hard to Calculate?
Calculating landed cost can be a complicated task. Many shippers cite lack of available data, resources, and time as reasons for not calculating TLC. The numerous variables involved can be difficult to ascertain, making the calculation challenging to complete accurately. Many of these elements require time and effort to uncover, causing some businesses to overlook this crucial figure entirely.
Before attempting the calculation, it’s vital to identify all contributing factors. This process can be labor-intensive, and time constraints can make it difficult for organizations to complete within a set period. The landed cost model must be continually updated, adding another layer of complexity.
Determining how far into the supply chain to include in the calculation presents another challenge. The absence of a definitive formula makes it hard to ensure everything that should be included is considered. While there are comprehensive formulas available, the more granular you become, the more complex your data will be.
Landed cost encompasses a range of fees incurred during shipping. While some of these costs are subject to reduction, others are dictated by factors beyond your control. In what follows, we outline the four primary factors contributing to landed cost and highlight why eCommerce businesses must calculate it for sound financial management.
Four Main Factors of Landed Cost
1. Shipping Costs
Shipping forms the primary chunk of your landed cost. It’s essential to understand the per-unit cost of delivering a package to your customer’s doorstep. Shipping costs depend on shipping zones, box dimensions, and delivery speed. However, storing inventory closer to your customer and securing better carrier rates can help reduce these costs.
2. Customs and Import Duties
Landed cost often correlates with international shipping due to additional fees compared to domestic shipping. Merchants can incur substantial expenses at customs that elevate the landed cost of imported products. These costs can vary based on the country and even the product type.
Using international fulfilment centres to ship products domestically can help avoid these costs. Depending on the shipping method chosen (DDP or DDU), duties can be paid upfront by the seller or at the delivery point by the customer, which impacts the landed cost. So Delivered Duty Paid (DDP) and Delivered Duty Unpaid (DDU) are two distinct international shipping terms. Under DDP, the seller assumes responsibility for all shipping costs, taxes, and duties until the goods are delivered to the buyer, while under DDU, the buyer is responsible for paying any import duties and taxes when the goods arrive in the destination country. However, sellers must note that customers may refuse packages requiring additional payment upon delivery.
3. Insurance and Compliance
Shipping insurance is an optional service often used for costly packages. Since it requires an additional fee to secure the contents, it needs to be factored into the landed cost.
4. Handling and Payment Processing Fees
Occasionally, shipments might include special handling fees, such as taxes, which must also be included in the landed cost.
Why do eCommerce Businesses Need to Calculate Landed Cost?
Calculating the landed cost is essential for the growth and financial stability of your eCommerce business, offering the following advantages:
Many eCommerce businesses determine profitability by considering just their shipping and manufacturing costs, leading to inaccurate profit calculations. The landed cost of a product represents its actual cost. Thus, understanding this cost is crucial for accurate budgeting and ensuring profitability.
Gain Supply Chain Insight
Landed costs can provide valuable insights into your supply chain efficiency and help streamline it. If you find shipping costs too high, you could look into other carriers or work with a third-party logistics (3PL) company with carrier partnerships and a network of fulfilment centres to reduce your costs.
kpi.com is the industry-enabling 3PL that helps eCommerce brands with order fulfilment and also offers accessible technology and analytics that provide an average shipping cost per shipping method, average storage cost per unit, average fulfilment cost per order, and many more distribution metrics.
A 3PL company with carrier partnerships and a network of fulfilment centres can help reduce your costs while providing useful metrics like average shipping cost per method, average storage cost per unit, average fulfilment cost per order, and more.
Make Informed Business Decisions
Knowing the landed cost of a product, as opposed to merely the wholesale price, enables you to discern which products are profitable and which ones aren’t. This information is invaluable in making strategic business decisions.
Since duties can be paid upfront by the seller (a method called DDP shipping), or at the point of delivery by the end customer (called DDU shipping, which requires the person accepting the package to pay only once the package enters its destination), the landed cost can be affected.
The seller determines who includes duties, but it’s crucial to note that the receiver or customer may reject the package if they have to pay additional money to pick it up (when they have already paid for the item(s), shipping, and sales tax).
In conclusion, understanding and effectively managing landed costs is critical to any business, especially for those in eCommerce. The calculation may seem complex due to several factors involved, such as shipping costs, customs and import duties, insurance and compliance, and handling and payment processing fees. However, the insights gained from this understanding can empower a business to make strategic decisions, optimize budgeting, and enhance profitability. Whether you’re dealing with DDP or DDU shipping methods, knowing your total landed cost helps you stay competitive and plan effectively for the future.
FAQ: Landed Costs
Q1: What is a landed cost?
A1: Landed cost refers to the total cost of a product once it has arrived at a buyer’s doorstep. The cost includes the purchase price, transportation fees, customs, duties, taxes, insurance, currency conversion, crating, handling and payment processing fees.
Q2: What are the main factors of landed cost?
A2: The four main factors of landed cost are shipping costs, customs and import duties, insurance and compliance, and handling and payment processing fees.
Q3: What is the difference between DDP and DDU?
A3: DDP, or Delivered Duty Paid, means the seller is responsible for all shipping costs, taxes, and duties until the goods are delivered to the buyer. DDU, or Delivered Duty Unpaid, means the buyer is responsible for paying any import duties and taxes when the goods arrive in the destination country.
Q4: Why is landed cost important for eCommerce businesses?
A4: Knowing the landed cost is crucial for eCommerce businesses to budget accurately, gain insight into their supply chain efficiency, and make informed business decisions. It ensures that profitability is accurately calculated and helps identify potential areas for cost reduction.
Q5: Is it difficult to calculate landed cost?
A5: Calculating landed cost can be complex due to the numerous factors involved. However, its accurate calculation is crucial to obtain comprehensive financial data and to facilitate informed business decision-making.