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What are landed costs?
Running a business

What are landed costs?

Landed costs are the total amount of money it costs to fulfil an order for a customer. Landed costs can include expenses like:

  • Raw materials
  • Shipping fees
  • Duties
  • Taxes
  • Tariffs
  • Insurance
  • Currency conversion
  • Other incurred costs

If your business ships physical products, determining landed costs are essential for informing your pricing strategy and protecting your bottom line.

In this article, you’ll learn all about landed costs, including how to calculate them and how to reduce them to improve your profit margins.

What are landed costs and why do they matter?

Landed costs are the true cost of a shipment by the time they are delivered to a customer. Calculating landed costs (also called landed price or total landed costs) is important in any industry that ships physical products, especially e-commerce, manufacturing and distribution.

There are five main factors that comprise the total cost of goods being shipped:

1. Product

This is the cost of obtaining materials and components from a supplier.

2. Shipping

Shipping costs include crating, packing, handling fees and transportation.

3. Customs

Customs clearance expenses occur whenever you’re importing or exporting products between different countries. These include duties, taxes, tariffs, levies, value-added tax (VAT), harbour fees, brokerage fees and customs broker fees.

4. Risk

Any costs to protect your inventory are included in this category, such as insurance, compliance, quality assurance and safety stock.

5. Overhead

These are your ongoing business expenses, including currency exchange rates, payment processing fees and due diligence.

These are the types of costs that make up the total landed costs figure. Landed costs are closely related with another shipping metric called freight on board (FOB), but there are some key differences.

FOB vs. landed costs: what’s the difference?

FOB is the price a retailer pays their supplier to acquire goods, excluding shipping and import fees. FOB includes export packaging, documentation, packing and delivery to the shipper. On the other hand, landed costs encompass all of the expenses that go into shipping a product. Put simply, landed costs are a more comprehensive metric than FOB.

Without taking all of these factors into account, you leave the core function of your business - generating profit - to chance. If you price your products too low because you haven’t factored in all your costs, it can hurt your profitability. If you mark up your products too high, you might send customers into the arms of your competitors.

Think of it this way: the total price of travelling from New York to London includes more than an airfare - you have to pay for your luggage, transportation to and from airports, meals and more. Without a detailed budget, it’s easy to overspend. The same principle applies for fulfilling product orders.

Let’s take a look at how to calculate landed costs.

Read more with our guide to import taxes in Australia.

How to calculate landed costs

To calculate landed costs, add the cost of a product, shipping, customs, risk and overhead expenses. That sum is the total landed costs.

Landed costs = product + shipping + customs + risk + overhead

Manually calculating landed costs can take up valuable time and carries added risk of inaccurate accounting, especially if you carry many products or have many types of costs to incorporate into the formula. With the landed costs feature in QuickBooks Online, you can automatically factor in freight rates, insurance and other expenses to ensure quick and accurate accounting of orders.

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An example of a landed costs calculation in a business

Let’s look at the landed costs formula in action. For the sake of this example, you run a business that sells custom T-shirts. Here are your expenses:

Unit cost: $2/unit (500 total units)

Shipment cost: $500, or $1/unit

Customs: 2%, or $0.04/unit

Risk: $5/unit

Overhead: $1.50/unit

Landed costs = $2 + $1 + $0.04 + $5 + $1.50 = $9.54

So, in order to make a profit, you’d need to mark up the shirts higher than $9.54 to make a profit. As you can see, overlooking just one factor could have a major impact on your bottom line, especially when you extrapolate to many products over long periods of time.

Three ways to reduce landed costs to increase your profit margin

If your landed costs are climbing higher than expected, your natural reaction might be to mark up your prices to pad your margins. However, a thorough audit of your landed costs can help you increase your profits without asking your customers to pay more.

Some fees that go into your landed costs are out of your control, such as taxes. But here are a few ways to keep costs under control:

1. Audit your supply chain partners

Unexpected extra fees are one of the most common causes of high landed costs. To ensure you’re getting the best value, compare what you’re paying for third party logistics, distribution centres and shippers versus other options on the market. If you’re happy with your current partners, you can try to negotiate better rates with them, especially if your relationships with your supply chain partners are strong.

2. Optimise your warehouse operations

An unorganised warehouse can lead to costly supply chain problems. Maybe you’re holding too much safety stock or your staff can’t find items in a timely fashion. Instead of relying on clunky spreadsheets to analyse your stock, leverage warehouse management software to get real-time insights and custom reports so you can identify weak spots before they hurt your bottom line.

3. Take advantage of inventory management software

As your business becomes more complex, so does managing inventory, especially if you do international shipping. According to the 2016 National Retail Security Survey, 16.5% of inventory “shrinkage” - i.e. lost inventory - stemmed from administrative and paperwork errors. This would result in costly audits and lost time.

QuickBooks automatically handles inventory management tasks and tracks every item in real time to mitigate the risk of backorders or carrying excess stock. It also helps you plan purchases from wholesalers and manufacturers, take advantage of early order discounts and forecast trends.

Benefits of tracking landed costs with QuickBooks 

Tracking landed costs is essential to maximise profits and save precious time. QuickBooks makes it easy to identify the true cost of your shipments so you can spend less time crunching numbers and more time growing your business.

With the QuickBooks landed costs functionality, you can automatically factor in freight costs, customs duties, insurance and other expenses to get a holistic understanding of what it costs to get your customers what they order. You can even calculate landed costs for old bill items from closed accounting periods to keep your records as accurate as possible.

Best of all, your landed costs tracking will sync with your accounting, pricing, reporting, inventory management and other features within QuickBooks so you can keep your whole business organised in one dashboard.

Final thoughts

Whether you’re shipping across states or across the globe, knowing the true cost of the products you ship is essential to make informed business decisions. Shipping costs are important, but that’s only one part of a much larger equation that impacts your team, your customers, and your bottom line. By keeping close tabs on landed costs, you’ll be able to budget more accurately than ever.

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