Landed Cost | Complete Guide for 2022

Insight

What is landed cost?

Landed cost refers to all expenses involved in getting a product from the retailer to the customer. This includes suppliers, warehousing, taxes, insurance, and more:

What is Landed Cost? It includes suppliers, production, insurance, shipping, import duties, warehousing, and taxes


Tracking and knowing how to calculate landed cost correctly is essential to accurately determining profitability. It’s similar to how customer acquisition costs (CAC) don’t provide independent insights—you also need to factor in customer lifetime value (CLV) to determine if your CAC is reasonable. 

Landed cost follows a similar principle: brands must identify their expenses to outline accurate profit margins. 

How to calculate landed cost

To calculate landed cost, add together your manufacturing cost + shipping cost + shipping insurance + import duties + other fees:

*In this landed cost formula, “other fees” include additional expenses like harbor and handling fees, freight charges, and payment processing fees. You'll need to factor these in to accurately understand profitability on your products. 


While the formula for landed cost is straightforward, collecting the required input data isn’t. You’ll need to use spreadsheets or an analytics platform to accurately determine each cost.

An example of calculating landed cost

Let's take an example of T-shirt fulfillment to calculate landed cost. For this, let’s assume the following:

  • You're shipping 100 T-shirts.
  • The cost to manufacture a T-shirt (which includes sourcing raw materials from the supplier and production costs) is $4/unit.
  • The cost to ship the T-shirts is a flat rate of $150.
  • You stored the T-shirts in a warehouse for 3 weeks prior, amounting to $50 in warehousing costs.
  • The shipping insurance is included (so $0 cost here).
  • The import duty rate is 10%.

Now, let’s plug the numbers into the formula:

$400 (cost of manufacturing the T-shirts) + $150 + {400*0.1} (import duty)  + $50 (warehousing costs) = $640

On a per unit basis the Landed Cost per T-shirt is $6.40 ($640/100 units) 

You might ask: is $6.40 a good or bad landed cost? 

The answer depends on how much you’re selling the 100 T-shirts for, as well as your other costs, such as marketing. 

If you’re selling the T-shirts for $20 each, a 212% markup, then the $6.40 expense may be sustainable for your business. 

Assuming none of the shirts are discounted, the 100 will sell for a total of $2,000, so you’d be well in the black when evaluating your profitability from the perspective of landed cost. The Gross Margins for selling all $100 units at full retail prices would be $1,360. However, to actually get to a true calculation of profitability, you must factor in your contribution margin, customer service, and other costs.

Breaking down the components of landed cost

Suppliers & production costs

These costs include the payments you make to suppliers for raw materials or goods, as well as the production and manufacturing expenses involved in creating finished products. 

Shipping costs

For landed cost, shipping fees focus on the costs of getting the product from the production facility to the location they’ll be shipped from. 

Shipping costs vary depending on factors like location, weight, and package sizes. You might also need to pay extra for services like special handling and expedited delivery.

Customs & import duties

Customs and import duties increase your expenses significantly, which is why landed costs are more commonly associated with international shipping. 

You can decide whether to eat the duty costs yourself or to offload them to the customer via pricier products. However, increasing retail prices may reduce sales.

Insurance costs

Shipping insurance is an optional service that you can opt for. Many major carriers offer some level of shipping insurance by default, but for more expensive packages, you’ll need to pay additional fees.

Handling & payment processing fees

Handling fees are paid to fulfillment teams for picking and packing your items for shipping, and payment processing fees apply to each transaction at your store.

Warehousing costs

Warehousing costs include storage, administrative, handling, and operational expenses. If you’re using multiple warehouses or special facilities (e.g. temperature-controlled environments), these costs add up further. 

How to optimize your landed cost for growth

Even the smallest differences in landed costs matter significantly as you grow. 

Use a complete formula to prevent mistakes

This point may be a given, but even a small mistake can have significant ramifications. For example, let’s say you forget to include the $10/unit insurance fees in your landed cost calculation for a product, and the total calculated cost is $55.

If you sell the product at $65, assuming a $10 profit, you’ll actually make zero profit because of the miscalculation. That’s why using the correct formula is vital–be sure to include all fees involved.  

Better manage budgets as you prepare to scale 

Growing fast is daunting. There’s so much more required of you. Demand surges mean there are more orders to fulfill in less time, but compromising on fulfillment times could lead to unhappy customers. Support requests go up too, and your competition becomes more aggressive.

But as overwhelming as growth can be, you must be prudent about your budget allocation. Taking on too many new hires or expanding your fulfillment network dramatically may not be sustainable. 

When you’re preparing to scale, keep a watchful eye on your landed costs and act quickly if expenses are rising. 

For example, your landed cost could increase due to spikes in handling and warehousing costs. In this case, you might want to consider more cost-effective options, like finding yourself a more stable priced logistics partner.

Understand how efficient your supply chain is

Supply chain efficiency directly influences your landed costs. An unoptimized chain could lead to losses at different stages. For example, if your warehousing and inventory management is inefficient, you might be spending more on storage and handling costs.

Similarly, if your packing process isn’t optimized, you might be spending more on shipping costs because of wrong-sized packages. 

Evaluate relationships with suppliers & 3PLs to better control costs

If you’re a fast-growing consumer products brand, you might have considered partnering with a third-party logistics (3PL) provider to match Amazon-level fulfillment expectations. 

While working with a 3PL can help you stay competitive, it also increases your external party reliance. That’s why cultivating strong relationships is all the more vital.

Third-party logistics providers help you scale fulfillment operations and maintain efficiency during demand peaks, like the holiday season. They can also help you cut down on shipping costs by distributing your inventory and negotiating carrier discounts. 

The better your relationship with a 3PL partner, the more you can rely on them (have you tried sending your warehouse pizza and brownies?).

Similarly, supplier relationships are crucial to maintaining supply chain efficiency and control costs. The COVID-19 pandemic highlighted the vitality of strong relationships with suppliers: brands with the best 3PL partnerships enjoyed priority deliveries when supply chain challenges arose and better rates. 

Conclusion

Calculating landed cost isn’t one of the more exciting aspects of running a business, but it’s absolutely vital, especially in order to grow sustainably. It’s also important to have reliable financial and analytics systems in place, so you can accurately determine the individual costs before adding them up.

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