What is a landed cost and how do you calculate it?
If you run a small to medium-sized business, or even if you’re part of a large corporation, you may feel that international shipping can be overly complex and unpredictable at times. However, armed with the right information and with access to expert support, you can find success with your imports and exports. One of the first things you’ll want to understand is how to arrive at your total landed cost.
What is landed cost?
A landed cost is the total charge associated with getting a shipment to its destination. It’s most commonly associated with international shipping, and usually refers to the cost of shipping, plus applicable duties, taxes and fees.
Landed costs do not end with duties and taxes, however. The total landed cost can include a range of additional factors, such as:
- currency conversion
- regulatory fees, including export licenses
- fraud prevention
- handling fees, such as packing and repacking
- payment processing
- additional duties, such as AD (anti-dumping) and CVD (countervailing duty)
If that feels like a long list of potential costs, you’re not wrong. That’s why it is important to plan for your landed costs in advance. Here is a deeper dive into some of these individual costs that you’ll want to keep an eye on.
Transportation is a core element of a landed cost. In general, as the speed of transportation increases, so does the cost of shipping. For example, if you need your shipment sent overnight by air, you should plan for a higher cost than if you have time to ship by ground. UPS offers a wide range of international shipping options for you to choose from, covering every need and budget.
Pro tip: Work with a logistics expert like us to identify ways of consolidating your shipment to reduce shipping costs.
All customs documentation should be filled out as completely and accurately as possible to determine the proper duties. Roman Klimenko, global operations manager with STTAS, a our company that specializes in global trade compliance, advises shippers to pay special attention to the commercial invoice, the primary piece of customs documentation when shipping internationally.
Among various easy-to-make mistakes, “it is common for shippers not to give the full address and contact information of the consignee, or to forget to specify the currency of the shipment’s value. Most importantly, giving a poor product description ultimately impacts classification and the duty associated with it,” Klimenko says. These types of inaccuracies can lead to delays at customs, which may drive up the landed cost.
However, paperwork needn’t be burdensome. “Shippers can take advantage of technology solutions like our Paperless® Invoice to facilitate the flow of customs information paperlessly, easily, and accurately,” says Christopher Mehlfelder, vice president of marketing for i-parcel, a our company.
Pro tip: If a product falls under the de minimis amount, which allows the import of unrestricted products duty free below a certain value, duties will ordinarily not be assessed. The de minimis amount varies from country to country, so it’s important to do your research.
Also, check whether a free trade agreement is in place with your destination country. If so, your product could be eligible for tariff relief, which will lower your landed cost.
Like duties, domestic taxes are a primary component to a landed cost. Some countries have more favorable tax policies than others, and it is important to review these in advance. Access resources such as the U.S. Commercial Service for advice on in-country sales taxes and for help identifying possible tax breaks.
Pro tip: Countries with low tax rates for a given commodity often result in a lower cost to the buyer, which pushes down the landed cost and is good for exporters. “A lower price point to the buyer can make a market more attractive to the seller,” Mehlfelder explains.
In most countries, duty is assessed on what’s called CIF (cost of goods, insurance, and freight). This means if the insurance cost increases, so does the duty amount, which drives up the landed cost.
Pro tip: Your cost of shipping may already have some insurance built into the cost, so figure out what this covers before purchasing additional protection. At the same time, pay attention to the differences between “Carrier Liability,” which all shippers provide, and enhanced insurance products like those offered by our Capital.
“If a shipment goes missing, or is damaged, oftentimes the experience is far superior if you have planned ahead for these scenarios with a risk mitigation partner like our Capital,” Mehlfelder says.
If a product requires a permit or other official authorization, this may increase landed costs. Permit requirements and export restrictions vary by country.
Pro tip: Be sure to arrange any required export licenses before your shipment enters your country of destination. Applying for licenses while your shipment is already in transit adds cost and complexity to your shipping process, which may affect landed costs.
You may occasionally be required to pay storage fees, also known as demurrage, relating to a customs inspection. This is a charge levied on container shipments left in the terminal after the allotted free time.
Pro tip: Use a single carrier, such as our company, to take care of all your international shipping needs, from pick up to customs clearance through final delivery, to reduce your risk of storage charges in the terminal.
“Returns management depends on many variables, not least of which is the product itself,” Klimenko says. For example, if you ship perishable food,illegal drugs,research chemicals,pharmaceutical products returns may not make sense. However, higher value articles of clothing could more easily be returned.
Calculating landed cost
“Calculating a landed cost is highly dependent on your country of import,” explains Klimenko. When you import a product into the United States, for example, an ordinary duty is assessed, insurance and freight (CIF) on the cost of goods sold (CoGS), whereas in other countries the duty is often assessed on CoGS, plus insurance and freight (CIF).
There’s also the question about who pays for what. Generally, landed costs fall on the importing party
Working with a full-service carrier like UPS, small to medium-sized businesses can arrive at an accurate understanding of their landed cost ahead of time.
Managing landed costs
We offers shippers a range of support services to help manage the complexity of landed costs.