If you are involved in international shipping at your company, chances are you’ve heard mention of the term “landed cost.” Understanding the landed cost of your international transactions is a key factor in making strategic business decisions. But what exactly is landed cost?
This blog post explains what landed cost is, why it’s important, the role of Incoterms in determining landed cost, how to calculate landed cost, and the benefits of using landed cost software.
Defining Landed Cost
Most of us are quite familiar with the idea of “cost” in general—it refers to how much money is required to obtain something. For example, we buy shoes from the local shoe store. The shoes cost $100, which means we pay $100 to the seller in order to obtain them… pretty straightforward, right?
However, in the context of international shipping, there are a variety of sub costs associated with the shipment of items from one country to another. These may include the price paid by the buyer to the seller to purchase the items included in the shipment, the cost of shipping, shipment insurance, customs brokerage fees, fees imposed by governments and import duties (aka import taxes or tariffs).
Landed cost refers to the total cost after adding all applicable sub costs. It’s meant to encapsulate the entire cost of shipping something from point A to point B, beyond just the price paid by the buyer to the seller for the product being purchased.
Why Landed Cost is Important
Why is knowing the landed cost of a shipment important? Knowing the landed cost enables you to make more strategic business decisions by planning ahead.
For example, let’s say you purchase a box of widgets from a company in Mexico for $1,000 using the Incoterms 2020 rule Ex Works (EXW). When you calculate the landed cost, you add $250 for shipping, $100 for shipment insurance and $150 for import duties that must be paid upon importation into the United States. Because you have taken the time to calculate the landed cost, you now know that your company must actually make available $1,500 total in order to pay for this shipment. Had you not taken the time to calculate landed cost, your accounting department could find themselves in a sticky situation because not enough funds have been allocated to support the purchase. This could delay the shipment, or get you in trouble with U.S. Customs for not paying import duties in a timely manner.
Making a habit out of calculating landed costs can facilitate supply chain planning and financial forecasting across departments. When you understand the true cost of moving products from one country to another, your team can make smarter decisions that will benefit your business both immediately and in the long-term.
A Note on Incoterms
Incoterms 2020 rules are published by the International Chamber of Commerce (ICC) and are often used in an international sales contract to spell out the responsibilities of the buyer and seller for the delivery of goods. They identify who is responsible for each part of the journey and when risk transfers from the seller to the buyer. If the international transaction uses one of the 11 Incoterms, this will affect landed cost calculation.
For example, if the shipment is using the Incoterm Delivered Duty Paid (DDP), which maximizes the seller’s responsibility and is essentially the opposite of EXW, the buyer is not expected to pay for shipping costs or import duties. Knowing which Incoterm is being used for the transaction is crucial to calculating landed cost accurately.
Calculating Landed Cost
When calculating landed cost, communication with your seller is key to understanding what costs are involved in the shipment. Get as much information as possible from the seller to determine what costs they expect you to pay. Part of this process may involve finding an Incoterm that both parties can agree on.
Keep in mind that beneath each sub cost making up the total landed cost, there could be even more detailed sub costs. For example, under the category of shipping costs, there could be:
- Shipping charges for transporting the items from the seller to the port of export.
- Separate shipping charges for transporting the items from the country of export to the country of import.
- Shipping charges for transporting the items from the port of import to the buyer.
Those are three different costs, all bundled together under the shipping costs category. On top of this, each of those shipping costs may be insured differently.
Think about it: It’s quite possible that the trucking company that moved your product from the seller to the port of export is a different company from the one that runs the ship or airplane that takes the shipment overseas. Even in a shipment in which the entire trip is done inland, control of the shipment could transfer from one carrier to another along the journey.
Hiring a freight forwarder can streamline the process—they arrange and book space with carriers for you, and they should be able to convey to you details regarding the nature and cost of the transportation, which can in turn help you calculate the landed cost. (See our article, 4 Things the Best Freight Forwarders Have in Common, for more information on choosing a freight forwarder to match your needs.)
Furthermore, your item may be dutiable, meaning it is subject to an import tax that must be paid to U.S. Customs and Border Protection (CBP) upon importation. The specific duty rate is based on the Harmonized Tariff Schedule (HTS) classification of the product, so it is important to classify your products with the correct HTS codes.
Some importers try to be sneaky and claim their item has an HTS classification that they know is incorrect, simply because that classification has a lower duty rate. This is not a good practice in any sense, as CBP sees this as misrepresentation, and it could result in the importer being subject to fines or penalties for non-compliance.
A variety of fees beyond the standard import duty may also exist, including Merchandise Processing Fees (MPF) and Harbor Maintenance Fees (HMF)—see our article A Case of HaruMpF and MumPF—as well as sales tax assessed in the U.S. or Value Added Tax (VAT) assessed by most other countries. (For a more detailed explanation of VAT, see our article Exporters May Be Eligible for Import Tax Refunds.) These additional fees must also be taken into account when calculating landed cost.
The process can be even more complex if the importer qualifies for preferential duty treatment under a free trade agreement, such as the United States-Mexico-Canada Agreement (USMCA, formerly NAFTA), which could enable them to import at a lower duty rate or even duty free, or if the countries involved participate in a Most Favored Nation (MFN) agreement, which can also result in a lower duty rate.
Note that if the transaction uses a different currency, accurate currency conversion to USD will be a factor as well.
Landed Cost Software
Calculating landed cost can be complicated, as there are a lot of numbers that must be taken into account. Trying to manage the calculations in a spreadsheet can be messy and time-consuming.
Because calculating landed cost can be difficult, Shipping Solutions offers an online software tool called the Landed Cost Calculator to help with the calculations. Just enter the country of import and country of export along with details regarding your shipment, and the Landed Cost Calculator will provide an accurate estimate of the total landed cost and landed cost per unit, while also detailing any free trade agreements or other regulations which may affect the calculation.
The Landed Cost Calculator also enables you to compare the landed cost of multiple countries of export at a single time. For importers, this can help determine which country of export would have the lowest landed cost and thus which is most favorable to source products from. For exporters, being able to compare multiple countries of export can help determine which distribution center to ship from in order to give your foreign customer the lowest possible cost for the shipment. Making the effort to give your customer the best deal possible can increase customer satisfaction and retention.
See how the Landed Cost Calculator can help your company. Sign up for a free trial subscription to the Landed Cost Calculator, request a private online demo of the Calculator, or call us at (888) 890-7447 for more information. There’s absolutely no obligation.
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