What Is Landed Cost?
Landed cost is the sum of all expenses associated with shipping goods to their final destinations, whether that means onto shelves in a warehouse or store or straight to a customer’s doorstep. The concept may sound like a case of simple addition — and sometimes it is that straightforward — but often there are many “extras” to account for and analyze, especially when working with companies in other countries. Cost for transportation aside, these extras include packaging expenses, taxes, insurance fees, customs duties, currency conversion, crating, storage and any other charges incurred along the product’s journey. Whether you’re a supplier or a buyer, understanding landed cost has important implications for purchasing, pricing and profitability.
Key Takeaways
- Landed cost is the total cost to ship a product to its final destination — though it is not part of COGS. It includes transportation, taxes, payment processing and other possible fees.
- Understanding and tracking landed cost becomes more critical when doing business internationally, which involves customs-related costs, exchange rates and other fees.
- When shopping around for products, keep in mind that higher landed costs can diminish any savings gained from a low per-unit price.
Landed Cost Explained
Landed cost, also known as total landed cost, represents all expenses involved in a product’s delivery to its final destination, whether by land, sea or air. Landed cost includes the per-unit cost of a product, freight, taxes, import and export duties, insurance, payment processing and handling fees, exchange rates and storage fees. These costs will vary from one country to another, or based on the time of year, how much is being shipped and other factors. Of note, landed cost reflects direct costs only, and it is not a component of cost of goods sold (COGS).
Why Is Landed Cost Important to Businesses?
Landed cost itemizes every fee involved in transporting a product through the supply chain to its end destination. In the world of global trading, factoring for landed cost is especially crucial, given the many expenses embedded in the international shipping process, such as customs and currency conversion. Landed cost is important to businesses because it impacts:
- Product pricing: If a business doesn’t account for landed cost, it may not charge enough for its products to cover all shipping expenses.
- Profitability: Incorrect product pricing, in turn, can decrease profit margins because the business will have to “eat” those expenses.
- Purchasing decisions: From a buyer’s perspective, it’s important to understand landed costs when comparing competitive offerings. For example, a product that costs less to purchase per unit from overseas than domestically may seem like the better deal — that is, until international freight fees, customs charges, cross-border taxes and insurance are tacked on. Such costs can take a sizable bite out of a business’s budget.
- Shipping decisions: Monitoring landed cost over time can help a company identify opportunities to reduce shipping expenses. Perhaps choosing a different shipping company or different mode of transportation can lower expenses. Or maybe the time is ripe to renegotiate with a carrier on volume shipping deals and discounts.