Landed Cost: Landed Cost Formula & Calculators
In small and medium businesses many small factors influence healthy profits.
One of the main subparts of the retailing business is the transportation of the purchased goods from your supplier to your stores.
This is where the concept of the landed cost comes into play.
Sometimes in the bigger picture, smaller constraints like these can be easily overlooked but they surely affect the net profit.
- What Exactly is Landed cost?
- Why Should I Care About Landed Costs?
- Importance of Landed Cost
- Why it’s Difficult to Calculate
- Calculation of Total Landed Cost
What is the Landed cost?
Landed cost is the total expenditure involved in buying a product and shipping charges for importing it to your warehouse.
Apart from the cost price of the product, landed cost is made up of different charges like customs duties, currency conversion, insurance and other costs up to the destination store.
Depending on the type of industry where you conduct business, the factors to calculate total landed cost can vary.
In other words
+ Shipping: Costs associated with crating, packing, handling, and freight
+ Customs: Duties, taxes, tariffs, VAT, brokers fees, harbor fees
+ Risk: Insurance, compliance, quality, safety stock cost
+ Overhead: Purchasing staff, due diligence cost, travel, exchange rates
= Landed cost
Why Should I Care About Landed Costs?
Analysis of the landed cost of a product helps in figuring out the obvious as well as hidden costs price for the retailer. It gives you insight into the actual amount paid to get your hands on the product.
Thus, it is extremely necessary to precisely disintegrate the cost price as it will help the seller to make better decisions.
Without any idea of landed cost, the store owner will have no choice but to believe the data in the spreadsheets.
But knowledge of the different charges accumulated will help him decide the selling price more efficiently.
Let us say you bought a flower vase for $50;
And its importing cost $15 due to its fragile nature (more than the average transporting cost for the same weight).
The total amount spent by you to get that vase in your store shelf i.e., Landed cost = $50+$15= $65
This example shows how landed cost can affect your selling price decision and how different products can have different costs involved in transportation.
Importance of Landed Cost
Landed costs unravel the hidden costs and thus help the retailer to sell it at an appropriate price.
The aim is to make sufficient profits to cover the extra expenses of importing the product and at the same time not seem very costly to the customers.
The landed cost analysis is important for the following reasons:
- Ensure estimated profit on the product by marking the price such that you can sell it with attractive discounts. When the total landed cost is accurately known, the profit margin per article is optimum.
- When the supply chain of the product and expenses at all the stages is broken down to calculate landed costs, it is easier to figure out the steps at which you can cut yourself some slack. This way savings can be done where possible.
- Precise data on landed cost can make you far-sighted, and therefore you make decisions not solely on the purchasing price of a specific product but other factors as well.
Why It’s Difficult to Calculate
Landed cost calculation is not at all easy if you are running a multi-product store.
Companies have to face many issues while determining the total landed cost for a product.
Some of the factors are incomplete data, lack of time, and unreliable resources.
Another factor that adds to the complexity is the uniqueness of landed cost for every merchandise. Depending upon the product it has to be calculated differently. The landed cost calculation model must be flexible and must be updated from time to time.
Lack of basic knowledge like what has to be included and what not can also cause difficulties.
How to Calculate Total Landed Cost
To begin, a sufficient amount of statistical data on hand is necessary.
However, the sooner you start developing a landed cost calculation model for your business, the faster you get the idea of what parts are missing.
This gives you the next thing to work on rather than sitting idle waiting for complete data. Starting with the basics and then adding on the minute details in the formula is the way to go.
Let us understand how to calculate the total landed cost of a particular shipment.
- It starts with determining the essential components that make up the Total Landed Cost.
- It includes the cost price of the product paid to the supplier and freight costs.
- If the shipment is imported overseas then customs duties and currency factors.
- Other optional costs are insurance, storage costs, etc. which depend upon the nature of freight.
Another factor that causes trouble in calculating Landed Cost is the time difference between receiving the shipment and the bill related to additional expenses.
The key here is to have knowledge and experience of the extra costs before they are applied on the way through. This enables you to get the cost almost equal to the actual cost.
Once, you have the data to start with, you can construct your formula for calculating the Landed cost.
Let’s Try an Example
Let us suppose the shipment of 100 units of a particular product arrives
- Supplier cost: $20 per unit
- Duty applicable at 4%
- Freight cost for the entire shipment was $200 – and the specific product represents one-quarter of the shipment (1/4th of the total shipment)
Total Landed Cost = $20 + (4% x 20) + ((200 x 25%)/100) = 20+ 0.8 + .5 = $21.3 per unit
Landed cost formula:
Net Landed Cost = Supplier Cost + (Duty charges) + (Shipment charges specific to this product/total units)
So now you have a clearer idea about how much you spent and what Selling price you should fix to get the desired profit margin.
We hope this article was helpful and was able to clear your doubts about Total Landed cost.