Understanding, Calculating, and Reducing Landed Costs with 3PL Partnerships

If you're an ecommerce business owner, effectively managing your profits and losses hinges on one critical concept: landed costs. This seemingly shrouded term represents the total price of a product when it has, quite literally, landed on your doorstep—inclusive of the original cost, transportation fees, customs, taxes, and all other expenses incurred along the way. Determining landed costs accurately can be the make-or-break factor in your financial health; it's an art form every business owner needs to master to keep your P&L in tip-top shape.

What Are Landed Costs?

Landed cost is an essential term in finance and logistics that refers to the total cost of a specific product once it has arrived at your customer's door. This calculation is a sum of all the various costs incurred throughout the supply chain process, right from its production to its final delivery at your doorstep.

The landed cost goes beyond the basic product price and incorporates numerous additional fees. For instance, it includes the product's original price, freight and shipping charges, import and export duties, insurance, taxes, and any processing fees associated with international customs. It also considers fluctuating factors like currency exchange rates, storage, and warehousing costs.

Quite simply, any expense connected with getting your product from your supplier to your customer is accounted for in the landed cost.

These costs could also include additional surcharges such as fuel and security or other related expenses like customs clearance, handling, or documentation fees. They can also include fees associated with giving your customer a seamless buying experience, like payment processing fees when they use their credit card or shipping insurance to protect their purchase en route. By incorporating all these costs into one comprehensive figure, landed cost provides a more accurate picture of your product's real expense.

Knowing and accurately calculating these costs helps you determine the actual profitability of each product and, thus, your entire business.

Elements of Landed Cost

Let's dive deeper into understanding the different elements contributing to the landed cost. There are far too many to go over in detail, but we'll cover some common ones here:

Product Cost

The first component of the landed cost is the actual cost of the product. This incorporates the costs of raw materials, manufacturing, labor, and any other expenses directly related to production. If this part of your landed cost is reducing your profit margins, it may be time to consider a new supplier or reassess all points of your supply chain. If you find that your unit cost is too high, a 3PL or 4PL may be able to help with your supply chain to bring down this part of your landed cost.

Transportation Expenses

Once your product is ready for shipping, transportation costs come into play. These include freight cost and shipping charges, which may vary depending on your package's weight, size, and delivery speed. (If you find that some expenses related to transportation are driving up the total landed cost of your products, it may be time to talk to a 3PL like All Points. Since 3PLs handle transportation for their entire portfolio of clients, they're often able to get discounts on the freight cost, harbor fees, and other costs associated with this process.)

Customs and Import Duties

Customs, import duties, and other customs regulatory fees cannot be overlooked when importing goods. These charges may significantly impact the final landed cost based on your product type and the country to which you're shipping. International shipping is another area in which working with a 3PL may save your business money. Yes, they may be able to negotiate the rates of these shipping expenses for your business, but they'll also be fully up-to-date on any global trade changes that could impact your business to find you the best route for your bottom line.

Taxes

The tax rates applicable in the destination country can influence the total landed cost. It includes various taxes like sales tax, VAT, or GST, depending on your customer's location. Don't forget about these expenses when calculating landed cost.

Insurance

Insurance is often factored into the landed cost to shield against potential damage or loss during transportation. The cost of insuring your goods hinges on the insurance provider and the type of coverage you choose. A 3PL partner like All Points may be able to save you money on shipping insurance because they help with the fulfillment of a massive amount of shipments.

Other Charges

Various incidental charges, such as customs brokerage fees, currency conversion fees, and storage fees, can add to the landed cost. Keeping a tab on these can help you more accurately calculate landed cost and maintain healthy profit margins.

Calculating landed cost involves understanding and summing up all these components. An accurate calculation gives you an insight into the true cost of your product, allowing you to price your products competitively, improving the bottom line of your e-commerce business. It's worth taking another look at every step of your business to ensure you're capturing every aspect of total landed cost.

Why Are Landed Costs Important?

Understanding the vital role of landed costs allows you to navigate the intricate realms of profitability and financial health. Landed cost, beyond just the base price of the material good, account for all costs related to getting a product to your customer's door, as we've discussed. These can include freight, insurance, taxes, customs duties, payment processing fees, and other costs often overlooked in traditional pricing strategies.

When these additional expenses are accurately factored in, they offer a clearer understanding of your true product costs, enabling more informed business decisions. These could involve setting appropriate selling prices, identifying profitable and non-profitable products, and even exploring potential markets for expansion.

Moreover, landed cost become crucial in the dynamic landscape of international business, where customs-related costs, fluctuating exchange rates, and other such fees come into play. Ignoring these could lead to underestimated product costs and unexpected financial losses.

In essence, accurately calculating and optimising landed costs isn't just a bookkeeping task - it's a strategic imperative that sets the stage for sustainable growth, maximised profits, and ultimately, a thriving ecommerce business.

How to Calculate Landed Cost

We're going to skip all the hand wringing because it's quite simple to calculate landing cost.

First up is identifying each component of the landed cost. This begins with the unit cost of your product—the core amount you pay to your supplier to actually acquire the product.

Next, add in the transportation expenses, which encompasses shipping and freight costs. If your product is crossing international borders, you also need to consider customs fees and import duties.

Then, don't forget risks like spoilage and damage. Ensuring your products while they are in transit or anticipating any potential losses, and factoring in these potential costs is a major part of getting your calculations right.

Finally, your landed cost calculation would not be complete without taking into account overhead costs. These can include warehousing, storage, shipping fees associated with fulfillment, costs linked to your inventory management system, and any special handling fees.

With all these taken into consideration, to calculate your landed cost, use the following formula:

Total Landed Cost = Cost of Product + Shipping/Freight Costs + Customs Duties + Risk + Overhead Expenses

This is your total cost. To figure out your landed cost per unit, use this simple formula:

Landed Cost Per Unit = Total Landed Cost/Number of Units

Understanding landed cost allows you to create a realistic and sustainable business plan, price your products accurately, and ensure your ecommerce business delivers profitable returns.

How to Reduce Landed Cost

If you look at everything landed cost includes, you'll find a wide range of opportunities to optimize. You can essentially perform a landed cost analysis by looking at each of these expenses. The fees involved in each cost should be assessed to ensure you don't lose money on inefficiencies. Here are some areas where you may be able to save or find a more favorable price.

Take a Look at Your Supply Chain

Examining your supply chain closely equips you with a comprehensive understanding of your costs, helping identify areas for refinement. By reassessing supplier relationships, you can strive for better deals, streamline procurement practices, and avoid cost inefficiencies. Additionally, optimizing warehouse management and predicting demand can save expenses associated with overstocking and dead stock. Notably, opening dialogues with your carriers about renegotiating shipping rates can also offer substantial savings. Remember, a flexible and efficient supply chain can be a key asset in controlling overall landed cost.

Negotiate Shipping Costs

Bagging a favorable deal with your freight carrier can significantly reduce your landed cost. By negotiating lower shipping rates, you can directly decrease the overall costs of getting your products to the market. Keep in mind, this reduction is not just a one-time saving; it spans across each shipment you send, resulting in substantial annual savings for your ecommerce business. Partnering with a 3PL like All Points may help with this as 3Pls often have more favorable rates due to the quantities they ship.

Avoid Unnecessary Fees

Make sure you're working with service providers that are streamlined and efficient. It isn't just a matter of getting your products to the warehouse—and then to your customers—on time. There are fees associated with your products overstaying their welcome along the way to your warehouse. Demurrage fees, for example, set in when your cargo spends too long at a terminal. And you can bet that the port officials won't be lenient about them. If your transportation provider keeps incurring these fees, it's time to consider another provider to save your business some money.

Reassess Your International Shipping Process

Examining your international fulfillment methods can also reveal hidden opportunities to save. The cost of long-distance shipments and associated duties could be reduced by utilizing international fulfillment centers. By placing inventory closer to your international customers, you'll decrease delivery distances and times, leading to lower shipping and customs charges. Furthermore, reconsidering package dimensions and delivery speed can also lead to significant savings as these are key factors in shipping costs calculations. Incorporate this strategy to enhance both the profit margin and the customers experience.

Turn to Third-Party Logistics Providers

A 3PL like All Points operates as an invaluable resource for ecommerce businesses seeking to reduce their landed cost. Your logistics management and supply chain efficiency directly influence your landed cost, and this is where a reliable 3PL comes into play. We'll break that down in more detail below.

How a 3PL Can Reduce Landed Cost

3PLs supervise and organize the complex network of transportation, from the suppliers to your store. By consolidating shipments and ensuring efficient route planning, they help secure better carrier rates and consequently reduce shipping costs.

As we discussed above, 3PLs leverage global distribution solutions that allow businesses to store their inventory in strategic locations around the world. By positioning these goods closer to the end customers, the transit time decreases resulting in reduced transportation costs. This is another way 3PLs can assist in lowering your landed cost.

Another important element lies in their expertise on customs and import duties. A competent 3PL like All Points has in-depth knowledge of international trade regulations, duty rates, and import taxes. By managing compliance and avoiding customs delays, they mitigate the risk of incurring additional charges, reducing the landed cost.

Overall, a strong relationship with your 3PL provider is essential for efficient operations. The better your relationship, the more you can fully leverage their resources and industry relationships. A smaller 3PL like All Points may be ideal because they get to know your business in a more intimate way than a larger 3PL. This allows them to better understand your needs and opportunities for cost savings. Interested in chatting? We can't wait to hear from you.

Landed Cost FAQs

What is the difference between standard cost and landed cost?

Standard cost is the outright expense involved in creating a product (and is often called the manufacturing cost), which includes raw materials and labor. In contrast, the landed cost refers to the comprehensive total of all costs associated with getting a product from its origin to the buyer of the product, including but not limited to, manufacturing, shipping, insurance, import duties, and overhead costs. While the standard cost focuses solely on production, the landed cost provides a complete picture of the total expense incurred in the process of getting a product to its final destination.

Who pays for landed cost?

In a way, the business producing the product pays for landed cost of an item. But these expenses—from production to shipping costs—should be considered when the company first sets the selling price per unit for their customers. So while your business may choose to cover insurance costs as a sign of great customer support, your pricing should offset at least some of the landed cost per unit.

How is landed cost calculated?

There isn't really a landed cost formula because manually calculating landed cost is easy. To calculate landed cost, you simply add up all of the costs associated with your product from manufacturing to delivery at your customer's doorstep for a production run or entire shipment. To get to the landed cost per unit, you divide this sum by the number of units in the production run.

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