Experienced online retailers know that their “shipping costs” are more than just their shipping costs! Sure, the price of shipping is significant, but there are also handling fees, taxes, and lots of other costs that tend to go under the radar. Throw all these “hidden fees” together and you get what’s called a landed cost — the true cost of acquiring your product, starting from the manufacturer and ending on your customer’s doorstep.
Knowing the landed costs of your products can be a huge advantage for pricing, product sourcing, company budgeting, shipping logistics, and many other aspects of ecommerce. But what are landed costs, how can you calculate them, and what do you do with them? In this guide, we’ll answer all your questions, and more!
What Are Landed Costs?
Let’s start with the short answer: a product’s landed cost is the total amount of money it costs to manufacture it, transport it, and deliver it, plus all other fees along the way.
But to get a good idea of what constitutes a landed cost, let’s look at the long answer. A landed cost encompasses any of the applicable areas below:
- Original cost of the item
- Shipping (and handling) fees
- Customs & duties
- Shipping insurance
- Currency conversion fees
- Loading and unloading
- Freight fees
Although warehouse and storage fees aren’t necessarily included in landed costs, you can choose to include them if you want to make more large-scale decisions on a certain product’s profitability.
But what’s the big deal with landed costs? Knowing the true cost of shipping an item helps you make better business decisions. Think about it: if you’re pricing your items based on just the shipping cost, your data will be inaccurate. You may think you’re making a certain amount of profit, only until you dig deeper to find that profit is eaten up by some small fees you overlooked.
Calculating landed costs lets you price accurately to hit your income goals, with no surprises. It’s a useful statistic to have when deciding which products to sell, or which manufacturers to buy from.
They can also help with big-picture decisions, such as whether it’s economically viable to expand into a new region, or they can signal it’s time to rethink your shipping logistics. In a nutshell, landed costs give you more reliable sales data for more effective management decisions.
How to Calculate Your Landed Costs
Calculating your landed costs is as easy as adding up all the charges we listed above. Depending on your particular shipping methods and locations, each merchant will have different landed costs, even if they sell the same product.
The bare-minimum formula is simply…
Manufacturing cost + shipping cost
However, that’s so simplistic, it almost never applies. A more common landed cost formula would be:
Manufacturing cost + shipping cost + shipping insurance + handling fees + taxes
If you’re selling internationally, you’ll also want to add:
… + customs & duties + import/export taxes + currency conversion + arrival/destination fees
And if you’re storing the goods in a warehouse, you’ll also need to add:
… + transportation from manufacturer + warehouse handling fees + boxing fees
There are also other, optional factors you can consider as well. For example, if you sell multiple products together as a bundle, they’ll have different shipping weights and fees. And of course, each geographical region will have its own landed cost based on how much money it takes to get it there.
If there are too many factors or loose ends, you can average out your landed costs to reflect all shipping methods and locations. That creates a single, convenient number to attribute to each product, albeit a generalized one, and is particularly useful when comparing the costs of different products.
To get that figure, calculate the landed costs of all the product’s individual orders and divide by the total number of orders.
3 Expert Tips for Calculating Landed Costs
1. Plan Ahead
It’s one thing to calculate the landed costs of products you’ve been selling for years — after all, you have a backlog of data to draw on. But what about new products you’re interested in selling? How can you determine a product’s viability without risk?
By planning ahead, you can estimate a product’s landed cost to see if it’s profitable enough to sell. Here’s some data to collect to make the most accurate landed cost estimate:
- the origin of the delivery
- the destination of the delivery
- shipping box dimensions
- shipping box weight
- delivery method
- applicable taxes
If you’re selling internationally, you’ll also want to look up some particulars about that destination:
- customs & duties
- arrival charges
- additional taxes
- currency conversion fees
Unfortunately, getting these numbers can require some effort, but the payoff is that you’ll have accurate expectations before you ever pay a cent.
2. Streamline Shipping Logistics
When calculating your landed costs, you may notice some glaring charges or outstanding fees. That’s a good thing! One of the benefits of calculating your landed costs is it forces you to reevaluate your shipping logistics.
Consider any areas for improvement when adding these numbers together. For example, are your transport fees too high? Try renegotiating with the manufacturer — maybe if you buy in bulk, they’ll cover transport costs to your warehouse.
So, if you find something that doesn’t seem right, look into it further.
3. Get Help from Inventory Management Software
Landed costs are all about crunching the numbers… but that requires getting a hold of those numbers in the first place. Our first tip was about gathering data on shipping methods, but what about your own internal data, like where most of your deliveries go, how many of each product you sell per quarter, or how much it costs to store, handle, and process a product?
The better your internal analytics, the easier it will be to calculate your landed costs. Inventory management software like ecomdash puts this information readily available at your fingertips. Ecomdash gathers all your inventory data automatically and presents it to you in helpful reports. That’s a huge time-saver when you’re plugging numbers into your landed cost formula.
So much about business involves predicting the future, but, as of this writing, that’s still impossible! Until that technology becomes available, you’ll have to rely on the next best thing: estimating future needs using past data. The more accurate your data — such as landed cost — the more dependable your forecasts. Not only will you be able to optimize your entire business model from the ground up, but you’ll also be able to experiment in new ventures with less risk.