Cross-border ecommerce brands face unique challenges in managing costs and supporting profitability as they navigate the complexities of global selling. One crucial aspect too often overlooked in this process is the landed cost of their products. Learn why understanding, calculating, and optimizing landed costs is essential for success in the international ecommerce space.
What is landed cost?
Landed cost is the total expense involved in getting a product from the seller to the purchaser’s location. This includes everything from the cost of the product, transportation fees, customs, duties, taxes, insurance, currency conversion, crating, handling, and payment fees.
Importantly, the landed cost of a product also represents the final cost borne by the shopper, reflecting the actual cost of purchasing and receiving the product. Without an accurate—or upfront—understanding and calculation of an order’s landed cost, both businesses and their customers might be in for some unwelcome surprises.
How to calculate landed cost
Calculating landed cost involves several components that go beyond the price of the goods themselves. To determine the landed cost, businesses must account for:
The foundation of landed cost is the product cost, which includes the expense of manufacturing or purchasing the goods themselves. This is more than the unit price; it encompasses all the costs incurred to produce or acquire the product and make it ready for sale, including raw materials, labor, and overhead.
Businesses need to ensure that they have a thorough understanding of their product costs to avoid underestimating the landed cost. Nevertheless, because brands often have pre-negotiated rates with their suppliers, these costs are usually the simplest component of a product’s total landed cost. It’s when we dig into the transporting of products that things get trickier.
Shipping costs are a variable (sometimes highly variable) yet significant component of landed cost, encompassing the expenses for transporting goods from the seller to the buyer. This includes freight charges, both for international shipping—often a combination of air and sea transport—and for the final leg of delivery within the destination country. The choice of carrier, shipping method, weight, volume, and distance all play a role in these costs, and companies (and/or their logistics partners) must negotiate favorable terms to manage these expenses effectively.
To protect against potential loss or damage during transit, insurance is an essential factor in the landed cost calculation. Insurance costs may vary based on the value of the goods, the shipping route’s risk, and the chosen insurance coverage level. Ecommerce brands must balance the cost against the potential risk to determine the most cost-effective insurance coverage.
Customs duties are taxes imposed by the destination country on imported goods. The rates are determined by the product classification according to the Harmonized System (HS) codes, the country of origin, and the value of the goods. Since duties can significantly affect the landed cost, businesses must accurately classify their products and be aware of the trade agreements and regulations that might apply.
In addition to customs duties, products sold internationally are subject to various taxes, such as Value-Added Tax (VAT), Goods and Services Tax (GST), and other sales taxes that vary by country. These taxes can be a fixed percentage or a variable amount and are a direct component of the final cost paid by the consumer. Companies need to understand the tax implications in different markets to set prices accurately and remain compliant with local laws.
Several miscellaneous fees can also contribute to the landed cost. These might include currency conversion fees, payment processing fees, handling charges, and costs associated with regulatory compliance, such as inspection fees.
Landed cost formula
Because there are so many factors involved in determining landed costs, there’s no one single formula. However, based on the information we’ve provided above, a simple, general formula for calculating landed cost would be:
Landed Cost = Product Cost + Shipping + Insurance + Customs Duties + Taxes + Other Fees
The importance of landed cost in international ecommerce
Understanding, monitoring, and minimizing landed costs are vital for several reasons:
Supply Chain Optimization
A clear insight into landed costs helps brands optimize their supply chain by identifying cost-saving opportunities, whether through negotiating better shipping rates or finding more efficient routes.
Accurate landed cost calculations enable businesses to budget effectively, avoid unexpected expenses, and follow global pricing strategies that help ensure profitability.
Determining (and Increasing) Profitability
Speaking of profitability: by understanding all the costs involved in delivering a product to the customer, businesses can make informed, data-driven decisions about pricing and promotions, directly affecting their bottom line.
Accurate Pricing and Improved Customer Experiences
Understanding landed costs isn’t all about driving transparency for global sellers, however. It’s also important for delivering desirable experiences to customers. Without the ability to accurately calculate and either incorporate landed costs into a product’s price or display them as part of an order’s total, ecommerce brands will risk losing out on important sales. When customers are hit with surprise customs duties, fees, and tax burdens, they routinely refuse and demand returns; worse, they often decline to come back to a brand for additional purchases.
How to improve landed costs with the right partner
To deliver improved customer experiences and maximize operational efficiency in global ecommerce, having the right partner can make all the difference.
Digital River helps drive landed cost transparency and efficiency on both sides of the buy button. With global tax solutions that deliver guaranteed landed cost calculation, ecommerce brands can get quick calculations and show customers the true cost of their order and eliminate surprises. (In the process, we’ll also handle the collection of all applicable fees, duties, and taxes.)
Plus, with Digital River, your brand can also tap into one of the industry’s largest global logistics networks with pre-integrated global carriers, low shipping and returns rates, and fast delivery times—all without having to change a thing about your existing supply chain. Reach new international customers and cut down on landed costs with cross-border, regional, and in-country shipping options in 240+ markets worldwide.
Contact us today to learn more about how Digital River delivers everything you need to grow and protect your ecommerce business.