13 MIN READ
If you’re not keeping track of the landed cost of your imported goods, then chances are you are pricing your products incorrectly and losing out on profits. This article will walk you through the basic landed cost principles you need to know in order to help your business grow.
Many of us in the Caribbean operate within the confines of a small marketplace. It means that in order to establish our uniqueness as manufacturers or retailers and make products available for sale which are competitive on the local market, we have to look outwardly to source our raw materials and retail inventory. While purchasing products from international suppliers is a great avenue for making your saleable end products more appealing and in turn attract new sales opportunities, with this comes an added cost of doing business that must be borne in mind when costing your items or else you may run the risk of losing money.
Take this very simple scenario. You purchase an item from a supplier located in the USA for $10 and make it available for sale to your customers at $20. However, in order to get the item to your doorstep in your home country, you have to pay $20 in shipping and $15 in import fees. You can see from this scenario that failure to take these extra expenses into account will cause you to lose money; $35 in this case. Added to that, consider that you travelled to the USA to make the purchase. Omission of this added travel expense would have increased your loss account even further. The price paid to your supplier is not the total price of your product. Before you price a product, you must have a clear idea of all of the costs associated with acquiring the product. This complete picture is the landed cost.
In this article, we will decode landed cost. You’ll walk away with a clear understanding of what it is, why it is important and how to calculate it. We will also give some special nuggets of information, which you as a Caribbean small business owner need to be aware of when importing your products.
Landed cost defined
The landed cost of a product is a cumulative measure of all of the expenses associated with getting a product from your foreign supplier to your doorstep. Cost components such as freight and the purchase price paid to the supplier are straightforward but other direct costs such as customs duties and taxes levied on the import, local logistics charges incurred at the port of entry and any other expenses incurred along the way as the product made the journey from the supplier to your doorstep, also form part of the landed cost.
When deciding what expenses you should take into account, it’s best to think of landed cost as having four main components:
Product
Shipping
Customs
Ancillary
Product cost is self-explanatory—it’s the price you pay the supplier for the product you’re purchasing. Shipping costs include transportation fees for inland, ocean and air, cargo insurance as well as any crating, packing or handling fees and any local port charges. Costs associated with customs include import duty, value-added tax (VAT) and any other regulatory fees in addition to customs clearance and delivery fees. Ancillary costs are the least obvious of them all and are often the ones forgotten. These include hidden expenses such as travel, payment processing fees, bank charges, foreign exchange fees and currency conversion. We will tackle the latter later on.
Each of these individual costs together form your landed cost and therefore the value of the goods you receive.
Why knowing your landed cost is important
First and foremost, keeping track of every expense associated with acquiring an item that is, the overall item cost, will help you with proper pricing. If you know the true landed cost for each item you sell, you’ll more accurately calculate how much profit you’ve earned based on your selling price. Furthermore, equipped with a true representation of your total costs, you’ll be able to determine how much wiggle room you have in your selling price when offering customers discounts or planning sales, while still maintaining a profit and safeguarding against inadvertent losses.
Apart from painting a true picture of your profitability, knowing your landed cost will also help to shape your buying decisions and allow you to critically analyze your supply chains to uncover opportunities where any cost savings can be made. Cognizant that the price you pay to your foreign supplier is not in fact your true price, you can ask yourself certain questions:
Will this item be profitable after I import it?
Does it make sense to purchase this item from an overseas supplier or is buying it locally a more cost-effective option?
Considering that import duty is a function of the freight cost, can I negotiate better rates with my freight forwarder so that my shipping cost has a lesser impact on the import duty I am required to pay?
Is there an alternative payment method I can use so that the transaction costs I incur are less?
Similarly, when comparing suppliers, you won’t be looking at the listed item price alone but also at the other associated charges, which will give a better indication of the true cost. For example, although supplier A is selling an item marginally cheaper than supplier B, supplier A’s inland shipping cost is noticeably higher, which in the end will impact your profit so purchasing the item from supplier B may be the better option. Knowing your true costs brings a level of clarity that informs your business decisions.
Conducting a thorough landed cost analysis with each of your shipments also has the potential to reveal unexpected or hidden expenses. For example, fluctuations in freight costs due to added charges such as peak season fuel surcharge and the like, could raise your total landed cost and impact your profits. You’d be armed with information that can guide you on whether you should increase your selling price so that you don’t lose out on profits or whether you should price compare freight forwarders to get the best rates possible.
Accounting for seemingly minute costs often uncover cost-saving opportunities that can potentially have a great impact on your profit-protecting measures without placing the burden on your customers by increasing your selling price—the latter having the potential risk of lost sales or pushing your customers in the direction of your competitors.
Sourcing products from overseas suppliers should help your business, not hurt it. Having an understanding of your landed cost will ensure that you know the exact cost of your inventory, help you maximize your pricing and hence your profits, and most importantly, assess your profits to determine if your business model is sustainable.
Sourcing products from overseas suppliers should help your business, not hurt it.
Calculating landed costs
Just as it is important to have a firm grasp of what landed cost is and why it is important, it is equally important to know how to calculate it as accurately as possible. Overestimating your landed cost can price customers out of purchasing your product while underestimating it could cut into your profits.
In certain instances, it may even be to your benefit to perform predictive landed cost estimates before making your purchase. By knowing exactly how much you will have to pay for your goods, you would be able to adequately budget for the intended shipment or you may even discover that it may be over-budget and adjust your order quantity as needed. Additionally, with this comes the ability to quote your customers with confidence or market your selling price and take preorders from customers even before you receive your products in hand. In such cases however, it is important to remember that your initial estimate was just that—an estimate. Therefore, you should always perform another landed cost calculation once you receive your goods and have all of your final costs.
To calculate the landed cost of your imported goods, first ask yourself, “What costs should I take into account?”. Ask yourself this question while keeping in mind the four main landed cost components outlined previously—product, shipping, customs, ancillary. The landed cost is the sum of the expenses that were incurred in each of these categories.
In the video below we’ll take a look at a simple landed cost calculation in action.
Unlike the example in the video above, more often than not there will be cases where you have multiple products within the same shipment. For example, in her shipment from the USA, Jean could possibly have had pants, bags and shoes in addition to her dresses. In such situations, when calculating the landed cost for each item, you will have to pro-rate the freight cost based on value. So in Jean’s case, if her dresses represented one quarter of the value of the shipment and the freight cost for the entire shipment was $320, then we would apportion a freight cost of $80 to the dresses.
Similarly, if the total value of the items in the shipment was $400 and the dresses alone were valued at $200, it means that the dresses would account for 50% of the total freight cost, which would amount to $160. You can see how this gets complicated for large shipments with multiple items. You’ll need to have a good process for yielding accurate landed costings in these cases. What’s very important here however, is the fact that the value of an item in a shipment has a direct relation to the freight allocated to that item, and therefore the duty imposed on that item.
You’ll realize that landed cost can sometimes vary between shipments for reasons other than a change in the associated component costs, such as product costs, shipping costs, and the like. Take note that the per unit landed cost of Jean’s dresses may be $64 for the above shipment and $75 in a subsequent shipment because what constituted the shipment would have changed; perhaps instead of containing dresses, pants, bags and shoes, it now contained dresses and hats alone. The question therefore is, how can you mitigate against such landed cost fluctuations so that your selling price remains unchanged while at the same time you don’t eat into your profits? Having a sound understanding of the RDL value-volume ratio of your shipments is the answer. We’ll discuss more on this in a subsequent blog post. Join our mailing list to be among the first to get access.
A quick word on…
Sales tax
When purchasing from international suppliers, the sales tax, or Value Added Tax as it is called in some regions, can be waived since the item will be exported from the country in which it was purchased. Asking your supplier to waive the sales tax is one way to reduce the overall cost of an item. However, it may not be a simple request. In most cases you will be required to prove that you exported the item, whether it is by way of showing your export documents or having the item delivered directly to your freight forwarder’s warehouse, who must then provide the supplier with supporting documentation that serves as proof of export. Unfortunately, this is sometimes an involved process, which many people opt to forego. Speak to your supplier to learn about their requirements and make that decision for yourself.
That aside, if you do decide to pay the sales tax, when working out the item cost for duty purposes, you must never include the sales tax as part of the cost because in truth and in fact it should have been waived. Including the sales tax would force you to have to pay more in import duty. On the other hand, when calculating your landed cost, ensure that you include the sales tax since this is an expense that you would have incurred. Not having to cost in the sales tax for customs purposes helps to minimize the import duty—perhaps not by a significant amount but it helps.
Exchange rates/Currency conversion
It is important to factor in currency exchange rates since it’s not uncommon for you to incur costs in at least two currencies, that is in the international country in which you purchased and shipped the goods and in your home country. You have to be aware that the cost attached to getting access to foreign currency varies per provider. Pay special attention to this.
Let’s consider for a moment that you live in Barbados and used an online money transfer system such as PayPal to make a payment to your USA supplier. The USD exchange rate on the Barbadian market is 2.0388 BBD = 1 USD. However, PayPal’s exchange rate may be higher at 2.0942 BBD = 1 USD. The extra indices of the exchange rate actually cost so when you’re calculating the absolute cost of your product, you have to bear in mind that the exchange rate you must use is both different from and higher than the market rate.
Taking things a step further, you should also remember that customs has a standard currency conversion rate. In Barbados it is 2 BBD = 1 USD, 2.9 BBD = 1 GBP and 2.6 BBD = 1 EUR. Therefore, the customs value of your goods will be different from the actual amount you paid to your supplier by virtue of the contrasting currency conversion rates. You should always bear this in mind when calculating your landed cost.
Discounts
When performing your landed cost calculations, you should disregard any spot discounts that you receive, for example discounts on freight, for the simple reason that in normal circumstances the discounted amount would have been included. Similarly, the discount may not apply for future shipments. This would become a challenge if your selling price was set based on a landed cost that took the discount into consideration. Any future shipments that were not afforded the discount would have an increased landed cost causing you to lose out on profits. Unless of course you choose to increase your selling price, which in itself may be fraught with difficulties such as disgruntled customers.
By now it should go without saying that you have to both pay special attention to and take into account all ancillary charges associated with getting your goods into your hands. Beware that you could also run the risk of incurring other ancillary charges apart from those discussed prior, such as port storage fees and demurrage charges, but your proactivity and your freight forwarder’s service efficiency will preclude you from driving your costs up with such penalties. Establishing a sound relationship with a reliable logistics company is key. Failure to do so and you will continue to lose small portions of revenue, which in turn would stifle your profitability and inhibit your potential to grow your business. Consult RDL →
WRITTEN BY DR. NAKITA ASHANTA HAYNES
RDL can help
We can provide you with a landed costing with delivery of each of your shipments and help you safeguard against landed cost fluctuations. We’ll also guide you on innovative ways to navigate the logistics industry so that you reduce your expenses, increase profits and grow your business. Let’s meet →
RELATED ARTICLE
Be the intelligent shipper—and here’s how
There is a clear correlation between the mode of shipping you choose, and the final cost of products procured for use in your business.