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How Landed Cost Impacts Your Wholesale Business

Posted by Robert BrandonPublished May 15th, 2024
— 6 minutes reading

If you run a business, your underlying goal is simple: make money. To do that, you’ll need complete clarity on the total cost of doing business. After all, what you pay for your products to get to your doorstep is more than what you see on the price tag. This is why understanding your product’s landed cost is so vital to your overall profitability.

So, what is landed cost? How do you calculate it? How do they impact your business’s bottom line? What are some tips and tricks to keep your landed cost low? Let’s break it down!

Landed cost definition

The textbook landed cost definition is the amount you pay to get a product from the supplier to your doorstep. That probably sounds similar to the cost of goods sold (COGS), and it is, but there’s a key difference. 

 5 Industries with High Landing Costs:  1. Pharmaceuticals
2. Automotive
3. Furniture
4. Apparel
5. Electronics

Typically, COGS accounts for the direct costs associated with getting a product ready for sale, such as materials, labor, and utilities. On the other hand, landed cost considers not only the direct costs but also the indirect costs, such as shipping, taxes, duties, and customs fees.

How to calculate landed cost

What you include when you calculate landing costs may vary slightly depending on your business. However, five data points most commonly play a role: unit cost, shipping, risk, customs, and processing. Here’s a general breakdown of what these costs entail. 

  • Unit cost—Unit cost is the per-unit acquisition cost. For a manufacturer, this would mean the total cost to produce a unit; for everyone else, it would be the price you pay your suppliers. The unit cost should also factor in carrying costs
  • Shipping—This is the cost to pack and ship a product. It will generally be the lion’s share of your landed cost. Shipping at a business level is expensive; the more you ship, the higher the fees.
  • Risk—This generally refers to risk protection, as businesses typically pay insurance on their inventory. There are other, less clear factors, however. Risk factors like returns, theft, and damaged goods also fall into this category.
  • Customs—Any fees your business incurs moving products across borders will fall into the customs category. Custom fees will have the most significant impact on companies who source their inventory overseas.
  • Processing—When you make a purchase as a consumer, there are fees associated with the payment process. Businesses generally factor in these fees when deciding on a selling price. However, B2B payment processing fees are often calculated separately since they depend heavily on order size.

You can roll any other fees not mentioned into a separate line item to ensure you account for everything. To calculate your landing costs, all you need to do is add all costs expenses together. The formula would look something like this: 

Landing cost formula :  Landing Cost = Unit cost + Shipping + Risk + Customs + Processing + Other Fees

Depending on your business and industry, some of these may not affect you. Even so, it’s important to know everything that could contribute to your landed cost. 

Why is landed cost important?

Above all else, landed cost is essential in figuring out your price point. After all, selling for less than you spent puts you in the red. When you calculate your landed cost, it forces you to take a closer look at the actual cost of doing business. This will allow you to do precise budgeting and forecasting. Landed costs can also help you determine whether or not you’re truly getting the best price from your suppliers after you factor in all the other fees. 

Industries like wholesale and retail often operate on razor-thin margins to remain competitive. A clear understanding of your landed cost can mean the difference between profitability and operating at a loss. 

How can you lower your costs?

It’s not really possible to eliminate your landed costs entirely, but it is possible to lower them. Generally speaking, it’s in your best interests to do so. The lower your landed cost, the greater your profit margin. Some of these costs are flexible, and others are extremely rigid. Learning every single policy might be a bit much, but sometimes there are legal ways to pay less. Outside of that, here’s a few ways to lower your landed cost.  

Reduce shipping costs 

We mentioned before that shipping tends to be the most costly part of landed cost. A big part of that is the sheer volume of shipments. Cutting costs on shipping saves money with each shipment, making it an ideal way to lower costs. This could be through making bulk deals, switching delivery services, or negotiating with existing suppliers.

Streamline processes 

It’s also important to consider the route a product takes to reach its destination. If it spends too long in one place, or doesn’t have a clear path, it’s raising the cost. This applies to other areas, too. Streamlining the path a product takes through your warehouse can save time and help fulfill more orders.  

 “If you know your landing cost, you can make informed pricing decisions, guaranteeing your desired profit margins.”

Read up on legislation

The law isn’t always flexible, but there’s a lot of exceptions when it comes to international trade. Shipments under a certain valuation may be exempt from customs fees, and other product categories may incur more. Whatever the case, it’s important to know what laws apply. If not, you could end up paying much more than you need to. 

Track your landed cost with software

Calculating landed costs can be tricky. It requires a lot of information from different areas, and some of it is very hard to track. Businesses that use the right software equip themselves with the necessary tools to make calculating landed costs simple. For example, businesses using our software, inFlow, can quickly determine landed costs.

inFlow allows you to set different costing methods, such as moving average, FIFO, or LIFO. It considers things such as vendor unit price, shipping/freight fees, non-vendor costs, service fees, and even the cost of components. And this is just the tip of the iceberg when it comes to inFlow’s functionality. It has everything you would need in a complete inventory management system, including reorder points, robust reporting features, and a built-in barcoding system. 

Wrapping up

Landed cost is one of many numbers you’ll use while running a business, but it’s a really important one. It forms a framework that will inform pricing, profitability, and decision-making. Breaking down your landed cost can help identify areas where you can cut costs, which will give your business a competitive edge and bolster your bottom line.

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