Understanding Landed Cost and Profitability

It’s the little things in life that make a big difference and the same is true in business.

Small factors can influence profitability and those who account for seemingly minute costs often achieve the greatest success. 

As such, it is important to know the landed cost of all of the goods that you sell, in addition to understanding the correct way to calculate it.

Our guide will help you do both! No accounting degree required.


  1. What is Landed Cost?

  2. Why is Landed Cost Necessary?

  3. Calculating Landed Cost

  4. Let’s Look at an Example!

  5. Landed Cost Calculators


What is Landed Cost?

Landed cost is an essential way to calculate your company’s bottom line by representing the total cost of a product on its journey from the factory floor to your buyer’s door.

It includes the price of goods, shipment costs, insurance fees, customs duties, and any other charges incurred along the way.

Not only is knowing how to calculate landed cost important, it is necessary to running a successful business.

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Why is Landed Cost Necessary?

There are obvious and hidden costs associated with getting any product to your customers. As such, the true cost of the products you sell may sometimes seem opaque.

But knowing your landed cost can bring clarity, allowing you to assess how your business is performing, maximize your pricing, and ensure that you know exactly how much you are paying for your inventory.

It also provides you the opportunity to analyze your supply chain and determine where it might be worth cutting costs.

This information enables you to calculate whether or not you will be able to make a profit on your products or even if your business model is sustainable.

But calculating landed cost can be difficult if you do not yet know your full expenses or lack the experience to anticipate how high the additional fees that often come up in shipping will be.

The key is to have the right set of tools to be able to anticipate and estimate a value that is as close to your actual costs as possible.

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Calculating Landed Cost

Figuring out your landed cost can be tricky.

Estimate too high and you may lose out on sales because of your pricing.

Estimate too low and your profits could suffer.

That is why it necessary to have the right tools.

Thankfully, Freightos offers two calculators that are invaluable for computing landed cost.

Remember: your initial estimate is just that. An estimate. Our calculators are a great way to get a solid idea of your costs, but you should always perform another landed cost calculation once you have your final numbers.

This is the basic equation that you will be calculating:
Shipping + Customs + Risk + Overhead = Landed Cost

Shipping

There is more to shipping than boxing your goods and putting them on a boat (or plane, truck, train, etc.).

There are costs associated with every aspect of the process, including crating, packing, handling, and freight.

You should always understand exactly what you are getting in your contract with a freight forwarder, as there are many different options of varying seller responsibility and liability.

Customs

Every country has its own authority for monitoring the flow of goods into and out of its borders.

These agencies are also responsible for collecting any duties, tariffs, value-added tax (VAT), brokers fees, harbor fees.

Risk

The costs of avoiding risk can add up, but not covering them can be even most costly.

Insurance, compliance, quality, and safety stock inventory are all vital considerations.

Overhead

Operating costs are the final part of the landed cost equation.

Purchasing staff, due diligence cost, travel, and exchange rates are included in overhead.

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Let’s Look at an Example!

Suppose you are looking to import 100 units of a product from Shanghai to Los Angeles. The per-unit cost is $50. The freight cost for the shipment is $1000 and it represents one-quarter of the shipment. The duty charge is set at 5%.

Per Unit Cost + Freight Cost + Duty Charge = Landed Cost Per Unit

$50 + ((1000 * 25%) / 100) + (5% * $50) = $55 Per Unit

Now let’s throw a curveball into the equation. Let’s say your goods are held at customs for three days and you are charged $100 for each day:

Per Unit Cost + Freight Cost + Duty Charge + Additional Charge = Landed Cost Per Unit

$50 + ((1000 * 25%) / 100) + (5% * $50) + (($100 * 3) / 100) = $58 Per Unit

The unforeseen cost added an additional $3 to your landed cost per unit. With this information in mind, you may choose to adjust your pricing model.

These examples may seem like a bit of a simplification of the concept, but Freightos users enjoy this kind of no-hassle math with every shipment.

Our marketplace is free to try, but you may prefer to begin with our freight rate and import duty calculators.

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Landed Cost Calculators

To use the freight rate calculator, enter the dimensions and weight of your shipment. Alternatively, select the Container tab for a full container load. Next, just choose your origin and destinations.

If you are importing into the United States, you can use our import duty calculator by specifying your Importing to and Exporting from locations, followed by the type of product you are importing.

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Freightos offers all of the tools you need to ensure smooth shipping. You may also want to check out our chargeable weight calculator. And don’t forget to check out our Ultimate Guide to Choosing a Freight Forwarder.