What is a Landed Cost?
A landed cost is the aggregate amount it takes a supplier to produce a product, ship it, and deliver it to the client. It covers transportation, raw supplies and extra charges like import taxes, shipping insurance, and others.
Significance of Landed Cost in E-commerce Logistics
Landed cost is an important component of business operations and profitability. The importance of landed cost includes –
- Identify scalable opportunities for optimization – A business owner must constantly search for ways to improve their logistics. By figuring out the landed cost, you can see where you’re spending the most and where your predictions are frequently off. You can use these indicators to find places where you might improve.
- Increases profitability – Running a successful business requires you to control your finances. The landed cost is one of the biggest predictors of revenue outflow when determining how much money is coming in. If you want your company to be profitable, you must monitor your landed cost.
Prerequisites to Calculate Landed Cost and How It Works
The prerequisites to calculate landed cost include –
- Manufacturing costs
- Costs related to transportation, import or export duties and tax
- Shipping costs
- Overhead costs
However, the landed cost calculation tends to vary according to the number of elements included. The basic formula to calculate landed cost is –
Landed Cost = Cost of manufacturing + transportation + import duties and fees + shipping-related costs + insurance + overhead costs + extra fees or taxes.
Use Case With Landed Cost
Assume a company XYZ produces shirts for global distribution. Each shirt costs AUD5 to produce, AUD1 for transportation, AUD3 for shipping and included insurance, AUD5 for storage and AUD1 for any extra transaction.
Thus, the total landed cost for one single shirt will be –
Landed Cost = AUD (5 +1+3+5+1)
= AUD15
Thus, if the company sells a single shirt for AUD40, the profit will be AUD40 – AUD15 = AUD25.