Launching your product into the world is exciting! You receive your first orders online, get picked up by some retail stores, and before you know it, you’re growing.
At this point, many business owners think, “I’m making sales, I have customers, I must be making money right?” Well, maybe. That’s why calculating your profit margins is key to your business’s growth. It measures how efficiently your company makes money.
Working out your profit margin is simple. All you need to do is subtract your products’ buying price from the selling price – right? Unfortunately, that’s not the case. To accurately measure your profitability in a global supply chain, you need to be familiar with the concept of landed cost.
So, what is landed cost? This post takes a deeper look at landed cost, discussing what it is, why your business needs to calculate it, how to calculate it, and more.
Let’s get started!
What is landed cost?
Landed cost is the total amount of money it costs you business to create a product, ship it, and have the customer receive it. It includes the cost of shipping and raw materials and additional fees such as shipping insurance, import duties, and other related costs.
What costs should you take into account?
Landed cost consist of the fees that you may encounter when shipping a product to your customers. Although you have no control over most of these fees, few can be reduced.
Here are 7 of the main fees involved in determining landed cost:
- Customs: Different countries have specific regulations and fees for exporting and importing goods. If you source raw or finished goods internationally, you should expect to pay custom-related costs like tariffs and duties.
- Insurance: You should also be ready to incur the cost of insurance for your merchandise. It protects you against stolen, damaged, or lost goods. Typically, the insurance cost depends on the category and value of your shipped goods.
- Demurrage fees:If your shipment exceeds the free time allocated inside a terminal or port, you’re supposed to pay demurrage fees. The longer the containers stay in the harbor, the more expenses you’ll incur.
- Exchange rate: When you source or ship internationally, you’re much likely to be affected by currency exchange rates.
- Free on board (FOB): This term is used to represent the person liable for products damaged during transit. And although it’s not a direct fee, it affects your purchasing and, thus, your shipping expenses.
- Port charges: You’ll also be needed to pay various port charges based on your shipment and its destination. You can even be forced to pay cancellation costs.
- Handling and processing fees: You may also be asked to pay special handling fees, such as surcharges, which must be added to the landed cost.
Now that you know the various costs you’re likely to incur, let’s see why you should calculate the landed costs.
Why is landed cost necessary for businesses?
Your CPG business needs to be profitable to grow. Yes, I know, captain obvious over here! But you need to understand your landed costs to have the actual value of your profits.
Here are the benefits you enjoy by knowing your landed costs:
- Budget correctly
As a CPG business, calculating profitability using only your manufacturing and shipping costs will result in the wrong profit margin, which messes up your budgeting big time.
However, using the landed cost allows you to get the actual cost of a product. You get the correct profit margin, allowing you to budget correctly. If used correctly, a budget doesn’t restrict you; it empowers you.
- Understand your supply chain
Calculating the landed cost gives you insight into the supply chain efficiency, making it leaner. If the shipping costs are too high, you may decide to check for other carriers or third-party logistic (3PL) firms that charge less.
- Make informed decisions
Knowing the actual value of a product allows you to make informed decisions for your business. For instance, understanding the real value of a product and not just its wholesale cost will help you decide which products are profitable and which aren’t.
Calculating landed cost
Calculating landed cost isn’t always a walk in the park. You may estimate too high, and risk losing a sale due to high prices. On the other hand, you estimate too low, and your profits suffer.
So, how do you calculate the landed cost? There is no one-size-fits-all formula for calculating the landed costs. However, the following equation is pretty popular.
Landed Cost = Shipping + Customs + Risk + Overhead
Below is a description for each of these components of the equation:
- Shipping: Shipping is all about boxing the goods and putting them on a plane, truck, train, ship, etc. – right? Well, it’s usually more than that. There are costs associated with all aspects of the process, including packing, crating, handling, and freight. You should factor in these costs while calculating the landed cost.
- Customs: Different countries have different laws regarding importing and exporting goods. You should include such fees as tariffs, duties, value-added tax, harbor fees, and brokers fees when calculating your landed cost.
- Risk: You should also factor the cost of risks while calculating landed costs. It helps you deal with uncertainties. Compliance, safety stock inventory, insurance, and safety are crucial considerations.
- Overhead: These are the operating costs. Add costs such as due diligence cost, exchange rates, travel costs, etc to get the correct landed cost.
Let’s look at a landed cost example to understand better how you can calculate it.
See how easy Fiddle makes it to calculate your landed cost with every PO you send and receive:
Calculating landed cost example
Suppose you want to import 100 units of a product from Germany to the U.S. Let’s assume that the cost per unit is $60, the freight cost is $900, representing a quarter of the shipment. Further, let’s take the duty charge to be 5%.
Landed cost per unit = Cost per unit + Freight Cost + Duty charge
This implies that,
Landed cost per unit = $60 + ((900*25%)/100) + (5%*60) = $65.25 per unit
Further, let’s assume that your goods are held in the customs for 5 days and you’re charged $60 per day, then;
Landed cost per unit = Cost per unit + Freight Cost + Duty charge + Extra charges
Landed cost per unit = $60 + ((900*25%)/100) + (5%*60) + (($60*5)/100) = $68.25 per unit
This means that the added cost per unit is $8.25. You can then adjust your pricing model based on your landed cost per unit.
A Better Way
Having the landed cost of a product is key to determining your profitability and planning. Ignoring the additional costs in shipping a product might mess with your expectations of the profits, jeopardizing your business’s future. Hopefully, you learned some solid practices in the post that will help!
If all of this talk of tracking landed costs still has your head swimming, we have your back! Our modern operations management software will help you track all of your landed costs across the board.
That means you don’t have to worry about using broken spreadsheets or any numbers slipping through the cracks! Start a Free 14-Day Trial (no credit card required) or schedule a personalized demo to see how it all works!