Landed Cost: What It Is and How to Calculate It
December 28, 2020
When they think of selling products online, the first thing most entrepreneurs research prior to ordering their first batch of inventory is what the landed cost will be.
Knowing exactly how much it will cost you as the business owner to manufacture, ship, and complete your payment processing fees before you see any profit is crucial to your ecommerce success. Understanding your shipping costs is important, especially when sourcing products from overseas, but this is overshadowed by other fees most ecommerce business owners forget to factor into their financial statements. Figuring out how taxes, customs, insurance, and other hidden fees affect your profit margins for each sale is the first step to building a profitable ecommerce business.
Whether you are new to the ecommerce space or you’re simply looking to optimize your existing profit margins, this post is for you. Before we dive into how you can calculate your landed cost to increase profitability, let’s cover what landed cost actually is.
What Is Landed Cost?
Landed cost impacts your profit margins, so ignoring these numbers can severely skew your business forecasting. You may think that just because you are selling a product for more than it cost to manufacture, the business is making a profit, but in fact, you may be spending more than you’re generating.
Your business landed cost is the total amount needed to create a product, to transport your product from the factory to a desired storage warehouse, and all the fees associated with fulfilling your customer’s order in between. This number also includes additional customs duty, importing and exporting fees, shipping fees, and the raw material cost of goods required by the manufacturer to produce your products. Because many ecommerce businesses rely heavily on sourcing products from overseas, import duties, taxes, tariffs, freight costs, harbor fees (if any), and insurance will also need to be factored into your landed cost.
So now you have a better understanding of what your landed cost pricing entails. But why should any of this matter to you as an ecommerce business owner?
Why Is Landed Cost Important?
If you haven’t realized by now, the only way to know how much profit you’re actually generating is if you know what your landed cost is. Without knowing this number, you may end up spending more than what you are bringing in, which will put you in the negative when it comes to your business financials.
When you calculate your actual spend versus manufacturing and shipping costs alone, you paint a better picture of what your product’s sales price should be above to remain profitable. In doing so, you also improve your operations since you can track your spend more effectively. If your goal is to sell your ecommerce business one day, you will also present a better opportunity to investors if you provide this information in full detail. Knowing what your landed cost will be prior to ordering inventory will also help you forecast future inventory orders based on the data you have collected over time.
Having your landed cost calculations documented to the best of your ability will not only ensure that your business remains in the green, but it may also uncover opportunities to save money on supply chain logistics. We can’t stress enough how important it is to track every expense for your ecommerce business within a proper P&L statement. Even if you don’t plan on selling the business anytime soon, it is still important to make sure this number is the true cost to keep your business from morphing into an expensive bill that you worked hard to receive (nobody wants to experience that).
If your goal is to sell the business for a huge capital gain, having your finances documented will be the first step you take to reach this goal. In order to turn your exit dreams into reality, having accurate financial metrics will get you there in a realistic timeframe. Aside from P&L statements, there are a few other important factors you will want to monitor to lower your landed cost, boost your profit margins, and get you to your exit goals sooner.
Shipping Costs
Transportation is the core element that determines what your overall landed cost will be. Naturally, as the time to deliver your product to a customer decreases, your shipping cost increases. If you have a shipment of inventory coming overnight by air, you should expect to pay more than if you were to send that same shipment by ground or sea freight. Outside of expected shipping times and mode of transport, other factors also come into play when determining where you can cut shipping costs to increase your margins.
A few of these costs you will want to look at are ways you can decrease the size or weight of your product boxing dimensions. Many ecommerce sellers we have spoken to highlight the cost savings they experienced once they switched to smaller and lighter packaging for their shipments. If this is something you, too, could implement into your logistics chain, you may find a quick decrease in your overall landed cost and, based on selling your products at the same price point, gain the benefit instantly, which will be reflected in an increase to your product’s profit margin.
Customs and Import Duties
This is where calculating your landed cost can get a little tricky depending on whether your product line is manufactured overseas. You may need to look at the customs fees and any associated import duties for the country your products are being shipped from (and to, if you’re outside the United States) in order to see how these numbers will affect your bottom line.
If international shipping is your only option and you can’t source a quality product within the country you are selling, you need to keep a watchful eye on these extra fees, as they may be subject to change at any moment. Different countries have their own customs to pay for imported goods, so if you are able to locate a destination country with lower custom fees, it may be worth exploring further to help increase your profitability.
Outside of shipping costs and international trade fees, risk management is another cost you must consider. This is especially true if you start ordering larger shipments of inventory to your desired storage facility (more on storage fees later on).
Insurance
With most business acquisitions both on and offline, mitigating your risk is just as important to your business success as selling your products above the calculated landing cost. While insurance is usually optional, it might be worth including if your cargo includes high-ticket items. On one end, products damaged during shipping can eat away at your profit margins, so if you can mitigate this cost with insurance, it may save you from an increase in landed cost. If your product is on the cheaper end of the spectrum, you should consider whether the insurance cost per unit makes sense—even more so if removing the insurance altogether will lower your landed cost while keeping your risk to a minimum.
Handling and Processing Fees
Some logistics companies and service providers charge an additional handling fee on top of regular shipping costs. This fee can go up or down depending on any additional steps you require (such as special packaging or shipping operations).
Handling fees will vary according to your shipment’s dimensions and weight, but another factor you should keep in mind is how the processing fees for your items will change. An administrative fee to process your inventory paperwork is an additional fee many ecommerce sellers forget to calculate, which can lead to an increase in their landed cost. Make sure you are well aware of what these fees are prior to signing up with any logistics or third-party logistics (3PL) service provider. This will not only ensure that you are calculating your true landed cost, but it will also lower your risk of eating into the business profits should these fees increase suddenly. You will need to track additional costs that, for one reason or another, do not fall into any of the above categories.
Overhead and Other Expenses
Now that we’ve covered the bulk of what you should be tracking to get your final landed cost, let’s wrap this up with the most difficult costs to calculate: overhead costs. Most of the time when ecommerce owners fail to calculate their landing costs correctly is when they forget to include their hiring of staff expenses. If this staff is needed to get your products from the supplier to your customer, their cost also falls under an expense that should be included in your landed cost.
Some other expenses you need to keep track of include the exchange rates of your products if they’re being sold in a market outside of your own. Many ecommerce business owners tend to forget that because their products are sold globally, exchange rates may be weakening their profits. Another expense that may lead to increased landed costs is unexpected charges for goods held at customs. This could be a huge hit to your profits in the small chance this happens to your shipment, as customs usually charges you a fee per day to store these goods until you resolve the issue.
Speaking of charging you per day to store goods, storage fees are a huge factor when calculating your final landed cost. Depending on your 3PL or Amazon logistics, you may find this expense, if the fees increase, start to increase your landed cost. Amazon is notorious for charging the most when it comes to storage fees due to the sheer fact that every Amazon seller has considered them at some point in time. If you are one of those Amazon FBA sellers currently storing all of your inventory within their ecosystem, you might want to see if storing your inventory elsewhere can lower your landed cost.
All this might seem like information overload, especially to ecommerce sellers who only want to focus on profits. Our goal, however, is to make sure you understand how landed cost affects your profits to make sure your business is, in fact, generating positive income.
How You Can Calculate Landed Cost
Let’s use the following example to show how profits are calculated with and without landed cost:
Without landed cost:
Product selling price: $55
Total cost (manufacturing and shipping): $50
Profit per sale: $5
With landed cost:
Product selling price: $55
Total landed cost (manufacturing, shipping, customs, fees, insurance, etc.): $65
Loss per sale: $10
As shown in the above example, factoring in landed cost displays your business’s true profits. Based on the landed cost in this example, we not only underestimated our profits, but we are also actually spending more than what the business is generating.
Understanding your landed cost provides insight into how much you’re spending to get the order to the customer. By including hidden and often forgotten costs associated with running your ecommerce business, you will have a clear picture of how your business is performing. So what is the best way you can avoid a loss as a result of your landed cost eating away at your business profits?
Use a Brokerage to Put Landed Cost at Ease
If you’ve been selling products online for more than a few months, you may have already been calculating your landed cost without knowing it. You might have a general idea of what your actual profits have been but are just not aware of how you should properly document these expenses in a P&L. This is one of the most important documents you need to have properly filled out if you plan to sell your ecommerce business for a huge capital gain.
Getting your P&L right the first time is imperative to ensure you don’t face a delay when a potential buyer is looking to present an offer on your business. The best part about using a service like the one we provide is that you will be given a business advisor to help ensure you have a proper P&L filled out before your business goes live on our marketplace. Having a dedicated team helping you build a proper P&L is one operation we excel in, but another bonus is the fact that we also provide a dedicated migration team to help transfer the business to the new owner for you.
If you’ve gained valuable insight into how you can lower your landed cost and are wondering how much your business is worth today, head over to our valuation tool. Once you have an idea of where the business currently stands, you can use this guide to improve on areas of concern and increase your asset value even more.
Ready to exit your ecommerce business now?
Schedule a meeting with one of our business advisors to discuss your exit goals. Once you have an exit strategy in mind, you can improve your landed cost using the information in this post and thus move one step closer to reaching your business, personal, and exit goals.
