When you import a batch of goods and resell them in the target market, it is vital to know landed costs. So, I wrote this article to help you have an overall understanding.
What is the landed cost?
Landed cost or price refers to all the expenses from buying products with selected suppliers to receiving them for your business. It includes product price, shipping cost from the supplier’s warehouse to your destination, duties, taxes, and other fees in the whole product sourcing process. When suppliers provide DDP price, it is just landed cost.
If you have a clearer understanding of landed costs, it helps you set product selling prices more accurately and get more profits. Besides, it is easy for you to find if something needs to be optimized in the entire importing process. Then, you can cut additional costs.
How to calculate the landed cost (formula & example)
Landed cost formula is always conducted as:
landed cost = product price + shipping costs + fees for customs clearance + overhead fees
In detail, I’ll explain each part of the landed cost and influential factors. Take 5CBM cargo from the Port of Ningbo to the Port of New York for example. The cargo is purchased at $10 per unit for 1000 items and weighs 750kg.
Product price
It refers to the money you pay your supplier for products. It mainly includes the costs of raw materials, product processing, and packaging.
In this context, the product price is 1000 x $10 = $10,000.
Shipping costs
It is related to cargo types, weights, volumes, and shipping methods like sea freight. It is not so difficult to estimate the shipping cost as long as you know how to calculate it and the real-time freight rate.
Suppose here you choose the LCL sea shipping method, plus express delivery from New York Port to your warehouse. So, the total shipping cost should include the following 3 parts:
Shipping cost from factory to Port of Ningbo.
Here it costs $90 to ship 5CBM cargo.
LCL sea shipping cost from Port of Ningbo to Port of New York.
This part includes sea freight fees and charges at ports. You’d better consult your freight forwarder. It will be much simpler and more efficient.
Suppose the LCL sea freight rate is $75/CBM, and other fees at port add up to $150.
So, for 5CBM goods, LCL sea freight cost = $75 x 5CBM + $150 = $525.
Shipping cost from the New York port to your warehouse.
This is the cost of delivering goods in the US. In this context, suppose you use express to transport the goods from New York port to your warehouse. The express company will calculate the actual weight and DIM weight. Then, they choose the larger one to charge fees.
Here is the DIM weight = 5CBM x 200 = 1,000kg. Because DIM weight > the actual weight (750kg), the fees are charged by 1,000kg.
Suppose the rate to be $6.5 per kg for express, the charges = $6.5 x 1000 = $650.
So, the total shipping cost is the sum of these 3 parts. i.e.:
the total shipping cost = $90 + $525 +$650= $1,265.
One more thing, you can buy cargo insurance, especially for goods of high value. If your goods are damaged or lost, you can ask your freight forwarder for claims. Remember to add shipping insurance fees to the total shipping cost if you buy cargo insurance.
Fees for customs clearance
It mainly includes the fees generated in the clearance process, which always come in 3 types.
Customs declaration fee
It is not decided by the shipment value but is charged by every customs declaration form with a certain amount.
A declaration fee is a must whether in export or import. That is to say, you need to pay an export declaration fee in China. That costs nearly $21. When the cargo arrives in the US, you also need to pay a clearance declaration fee. That requires $100-200.
Suppose the total customs declaration fee is $150 in this example.
Duties and taxes
As a matter of policy, you need to pay any required import duties and taxes according to the regulations of importing countries.
Duties are related to the type and value of cargo. In the US, any imported goods with a value of $800 or more are subject to import duties. Suppose the import duty rate is 6% here. Then,
Import duties = import duty rate x value of goods = 6% x $10,000 = $600
As one of the tax types, VAT relates to the cargo’s HS code and policies in different countries. Note the US doesn’t levy VAT on imported goods. But there exist the following 3 kinds of taxes.
- Merchandise Processing Fee (MPF) — calculated by 0.3464% of shipment value and not less than $27.2.
- Harbor Maintenance Fee (HMF) — calculated by 0.125% of shipment value.
- Federal excise tax — only for particular items like alcohol, tobacco, etc.
Here in the example, you need to pay:
- MPF = 0.3464% x $10,000 = $34.64
- HMF = 0.125% x $10,000 = $12.5
In this context, the total duties and taxes = $600 + $34.64 + $12.5 = $647.14.
Agency fees
Importers generally seek a customs broker to help deal with customs clearance, which is complex. He’ll charge you the service fees. The fees vary from one broker to another. Moreover, customs bonds are required when importing in the US, which is also covered 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
In this context, total fees for customs clearance = $150 + $647.14 + $100 = $897.14.
Overhead fees
It refers to the fees generated in the process of money transfer, such as payment processing fees, bank charges, and exchange rates, etc. Most of them are easily overlooked. And these types of fees are related to payment methods, processing banks, and the amount of money.
Suppose you use T/T to transfer money to a Chinese supplier.
In this context, the fees are $45.
Now let’s back to our example of 5CBM cargo. From the above calculation, we can estimate the total landed cost.
- Product price: $10,000
- Total shipping cost: $1,265
- Fees for customs clearance: $897.14
- Overhead fees: $45
The total landed cost = $10,000 + $1,265 + $897.14 + $45 = $12,207.14
How to reduce the landed cost
Obviously, if you pay less landed costs for your imported cargo, there will be more space for your business profits. Here I list some methods to help you reduce the landed cost.
Reduce shipping cost
You can choose trade terms like FOB, CIF, or DDP to let suppliers arrange parts of shipping. Because suppliers have long-term cooperative freight forwarders whose shipping charges may be lower than that of the forwarder you find.
You don’t need to worry suppliers will get additional profits from the shipping process, as they don’t want to lose your order for such little money. Besides, total shipping costs vary among different trade terms. You can choose the most cost-effective one according to your situation.
Various shipping methods also influence the shipping cost. Sea freight is the cheapest but the lowest. If your shipping time is abundant, sea freight is a good choice.
Another factor for shipping costs is the packaging and loading of goods. Conduct reasonable packaging for goods. And make full use of the space of carton boxes and container space while ensuring the protection of products.
Reduce product prices
The key is to know the market price of your desired product. Then, communicate with your supplier for more preferential prices. It needs some techniques. When you have a great volume of orders, it’s relatively easy to negotiate a better unit price.
But if your orders are small, you can’t blindly pursue the lowest unit price. At this point, you can be flexible during negotiation. For instance, you can try to use the supplier’s favorable payment methods, like T/T 100% in advance, so as to increase your bargaining power.
Highlight: Don’t blindly choose suppliers or freight/customs brokers at a cheap price in the pursuit of lower landed costs. You need to balance the quoted prices and the quality of products and services.
In cross-border purchases, finding a reliable sourcing agent is a good option for you. They not only offer competitive product prices for every type of goods, but help you check every important aspect like quality inspection on your behalf. In addition, they can integrate high-quality freight forwarders to ship goods to your door at a good price. In short, the professional sourcing agent is your trustworthy partner to grow your business.
Landed cost vs FOB
Simply put, the FOB price is a part of the landed cost.
As mentioned above, landed cost covers the sum of the product price and all expenses generated in the process until you receive the goods.
Under FOB, free on board or freight on board, the quotation given by the seller includes the product price +shipping cost from the factory to the departure port + export declaration fee. That means you pay suppliers these fees. They are responsible for shipping goods to the departure port and delivering them to your country. After that, you need to pay the rest of the fees, such as sea/air freight fees, clearance fees, and transportation fees in your country.
The end
I hope this article makes you more clear about the landed cost and know how to calculate it. If you have any further questions, just comment below.
As a leading sourcing company in China, StrategicSourcing has assisted plenty of clients to purchase commodities at a competitive price and helped arrange the most cost-effective shipping. They all save a lot on the total landed cost. CONTACT US to support your import business.
