Landed Cost: What It Is and How To Calculate It

Landed Cost: What It Is and How To Calculate It

When importing a batch of goods to resell in the target market, it’s important to understand the landed costs. Therefore, I’ve written this article to help you gain a better understanding.

• Understanding Landed Cost
• How to Calculate Landed Cost (Formula & Example)
• Tips on Reducing Landed Costs
• Landed Cost vs FOB

Understanding Landed Cost

Landed cost, also known as price, refers to all expenses incurred from purchasing products from selected suppliers to receiving them for your business. This includes the product price, shipping cost from the supplier’s warehouse to your destination, duties, taxes, and other fees involved in the entire product sourcing process. If suppliers provide a DDP price, it is equivalent to landed cost.

A clear understanding of landed cost will enable you to set product selling prices more accurately, resulting in higher profits. Additionally, it makes it easier for you to identify areas that require optimization in the entire importing process, allowing you to reduce additional costs.

How to Calculate Landed Cost (Formula & Example)

To calculate the landed cost, use the following formula:

• landed cost = product price + shipping costs + customs clearance fees + overhead fees

Let’s break down each part of the formula and its influential factors. For example, let’s say you have 5 CBM of cargo being shipped from the Port of Ningbo to the Port of New York. The cargo was purchased at $10 per unit for 1000 items, and it weighs 750kg.

Product Price

This refers to the amount of money you pay your supplier for the products. It includes the costs of raw materials, product processing, and packaging.

• In this case, the product price is 1000 x $10 = $10,000.

Shipping Costs

Shipping costs are related to the type of cargo, weight, volume, and shipping method (such as sea freight). Estimating shipping costs is not difficult as long as you know how to calculate it and the real-time freight rate.

Let’s say you choose the LCL sea shipping method and express delivery from the Port of New York to your warehouse. The total shipping cost should include the following three parts:

Shipping Cost from Factory to Port of Ningbo

It will cost $90 to ship 5CBM of cargo.

LCL Sea Shipping Cost from Port of Ningbo to Port of New York

This part includes sea freight fees and charges at ports. Consult your freight forwarder for information on the LCL sea freight rate and other fees at the port.

Suppose the LCL sea freight rate is $75/CBM, and other fees at port add up to $150.

For 5CBM of goods, the LCL sea freight cost = $75 x 5CBM + $150 = $525.

Shipping Costs from the Port of New York to Your Warehouse

This cost reflects the delivery of goods within the United States. In this case, assume that express transport is used to move the goods from the Port of New York to your warehouse. The express company will calculate both the actual weight and DIM weight of the shipment, and choose the larger of the two to determine fees.

For example, if the DIM weight is calculated as 5CBM x 200 = 1,000kg, and the actual weight is 750kg, the fees would be charged based on the DIM weight of 1,000kg.

Assuming the express rate is $7.5 per kg, the charges would be $7.5 x 1000 = $750.

Therefore, the total shipping cost would be the sum of these three parts:

Total shipping cost = $90 + $525 + $750 = $1,365.

In addition, it is recommended that you purchase cargo insurance for goods of high value. In the event that your goods are damaged or lost, you can request a claim from your freight forwarder. Please remember to add the shipping insurance fees to the total shipping cost if you choose to purchase cargo insurance.

Fees for Customs Clearance

This section covers the fees associated with the customs clearance process, which can be broken down into three types:

Customs Declaration Fee

This fee is charged for every customs declaration form and is not based on the value of the shipment. It is required for both imports and exports. For example, in China you must pay an export declaration fee of nearly $21, and in the US you must pay a clearance declaration fee of $100-200 when the cargo arrives.

Suppose the total customs declaration fee is $200 in this example.

Duties and Taxes

As per the regulations of importing countries, you are required to pay any applicable import duties and taxes. Duties are determined based on the cargo’s value and type. For instance, in the US, imported goods valued at $800 or more are subject to a 6% import duty rate. Therefore,

Import duties = import duty rate x value of goods = 6% x $10,000 = $600

Value Added Tax (VAT) is another type of tax that is determined based on the cargo’s HS code and the policies of different countries. Note that the US does not levy VAT on imported goods, but there are three other types of taxes:

• Merchandise Processing Fee (MPF) – calculated at 0.3464% of the shipment value and not less than $27.2.
• Harbor Maintenance Fee (HMF) – calculated at 0.125% of the shipment value.
• Federal Excise Tax – only applicable to particular items such as alcohol, tobacco, etc.

In this example, you need to pay:

MPF = 0.3464% x $10,000 = $34.64 HMF = 0.125% x $10,000 = $12.5

Therefore, the total duties and taxes = $600 + $34.64 + $12.5 = $647.14.

Agency Fees

Importers often use a customs broker to help with the complex customs clearance process. The broker will charge a service fee that varies depending on the broker. Additionally, customs bonds are required when importing in the US, and this is also included in the broker’s service fees.

Suppose the import agency fee is 1% of your goods value, so agency fee = $10,000 x 1% = $100

Therefore, the total fees for customs clearance = $200 + $647.14 + $100 = $947.14.

Overhead Fees

These fees are associated with the process of money transfer, such as payment processing fees, bank charges, and exchange rates. They are often overlooked and vary depending on the payment method, processing bank, and amount of money.

Suppose you use T/T to transfer money to a Chinese supplier.

• In this example, the fees are $45.

• Now, let’s estimate the total landed cost of the 5CBM cargo using the above calculations:
• Product price: $10,000 Total shipping cost: $1,265 Fees for customs clearance: $947.14 Overhead fees: $45
• Therefore, the total landed cost = $10,000 + $1,365 + $947.14 + $45 = $12,357.14.

Tips on Reducing Landed Costs

Saving on landed costs means a bigger profit margin for your business. Here are some ways to help you reduce these costs:

Lower Shipping Costs

Choose trade terms like FOB, CIF, or DDP to let suppliers handle parts of the shipping process. Most suppliers work with their own long-term freight forwarders, whose shipping charges may be lower than a third-party forwarder you might find.

You don’t need to worry about suppliers making extra profits from shipping, as they wouldn’t risk losing your order over such a small amount of money. Keep in mind that total shipping costs vary among different trade terms, so choose the most cost-effective one for your situation.

The shipping method you choose also affects your costs. Sea freight is the cheapest, but it takes longer. If you have plenty of time, sea freight is a good option.

The packaging and loading of goods also impact shipping costs. Pack your goods reasonably and make full use of carton boxes and container space while ensuring product protection.

Negotiate Product Prices

Knowing the market price of the product you want to buy is key. Then, communicate with your supplier to get more favorable prices. It takes some negotiating skills. If you have a large volume of orders, it’s easier to negotiate a better unit price.

If your orders are small, don’t solely focus on the lowest unit price. Be flexible during negotiations. For example, use the supplier’s preferred payment methods, like T/T 100% in advance, to boost your bargaining power.

Important: Don’t choose suppliers or freight/customs brokers solely based on low prices. Consider the quality of their products and services.

In cross-border purchases, finding a reliable sourcing agent is a good option. They not only offer competitive product prices for every type of goods, but also help you check important aspects like quality inspection on your behalf. Additionally, they can integrate high-quality freight forwarders to ship goods to your door at a good price. A professional sourcing agent is your trustworthy partner for growing your business.

Landed Cost vs FOB

To put it simply, the price quoted as FOB (Free on Board) is a part of the landed cost.

As mentioned earlier, landed cost includes the sum of the product price and all expenses incurred until you receive the goods.

In FOB, the seller’s quotation includes the product price, shipping cost from the factory to the departure port, and export declaration fee. This means you pay these fees to the supplier. They are responsible for shipping the goods to the departure port and delivering them to your country. After that, you will need to pay the rest of the fees, such as sea/air freight fees, clearance fees, and transportation fees in your country.

Conclusion

I hope this article has helped you better understand landed costs and how to calculate them. If you have any further questions, please feel free to leave a comment below.

As a top sourcing company in China, Onestopimport has helped numerous clients purchase commodities at competitive prices while arranging the most cost-effective shipping. By doing so, they have saved significantly on their total landed costs. Contact us to support your import business.