What is the true cost of getting a package to your customer’s doorstep? It isn’t just the shipping label you buy and stick to your box or envelope. It goes beyond the money you invest into materials or inventory storage. There are dozens of potential fees and expenses required to get your products from suppliers to your customers’ doorsteps. Every cent you put into your supply chain is what makes up your landed cost.
Knowing your landed cost is vitally important to running a profitable ecommerce business. Below we examine exactly what it entails, how to calculate it, and how you could potentially lower it to save yourself some money.
Landed cost definition
Landed cost is the total cost invested in a product by the time it’s delivered to a buyer.
The purpose of a landed cost is to calculate your total investment into your products. You can then compare it to your revenue in order to ensure your business is actually profitable or potentially profitable.
If you’re running your own ecommerce business, you should be estimating landed cost before you ever start shipping products to ensure you’re not digging yourself into a financial hole. Then you can take a look at your actual landed cost once the deliveries are being made to confirm you’ve done a good job running the numbers.
How to calculate landed cost
Calculating your landed cost is an exercise in good bookkeeping. You need to predict and audit your expenditures to identify all of the individual costs that go into moving your inventory from port to porch, as they say.
This is easier said than done, of course. It’s hard to predict the cost of shipping because you never know where your buyer will live. It’s nearly impossible to predict factors like, for example, a global pandemic causing a massive increase in supply chain costs. But that doesn’t mean the exercise isn’t worth doing. Calculating landed cost allows entrepreneurs to broadly understand how their businesses are performing to identify risks or opportunities and adjust accordingly.
Landed cost formula
Landed cost is not a perfect science and will be different for every business. But in general, when calculating landed costs you want to include all of the factors in the following formula.
Cost of manufacturing
+ Cost of transportation, import duties and fees
+ All shipping-related costs, including insurance
+ Any overhead costs
+ Any remaining fees or taxes
= Landed cost
Let’s look at each of these factors in a bit more detail:
Cost of manufacturing
This is one of the simpler ones. It represents the price of your goods. Normally you have an all-encompassing, pre-negotiated rate with your supplier so this shouldn’t be too hard to calculate. That said, be aware of potential rush charges or secondary fees and build these into your landed cost analysis.
Cost of transportation, import duties and fees
This represents all of the costs involved in getting your inventory from a supplier to your warehouse or third-party logistics partner. If you’re working with local suppliers this might not be that hard, but if you import your goods internationally, as is common in ecommerce, there’s a lot more to consider. Freight transportation can be costly and you need to consider how well you’re optimizing space in storage containers or crates. Working with a freight forwarder may be your best bet but that’s another fee to try and map out. Customs fees and duties vary by country and product category, so you really need to research and identify those that apply to you—or work with an expert (again incurring more costs).
The cost of the labels and shipping materials should be calculated here, but there’s also shipping insurance to consider (if you provide any). Depending on where your buyers are located you may also need to decide on paying duties upfront or passing those costs onto the buyer. The shipping costs category is particularly important to nail if you’re considering offering free shipping to buyers.
Employee salaries and overtime. Storage or warehousing costs. Shipping materials. 3PL and other partner fees. Think of all the remaining overhead costs that are required for managing your inventory and jot them down. Now for the tricky part: Clearly all of your overhead costs can’t be attributed to a single item. You’re going to need to consider how you break down these costs to attribute a fraction of them to a single piece of inventory. It may be as simple as dividing the total monthly cost by the number of individual items you sell in a month. Find the formula that works for you.
Remaining fees and taxes
Do you need an export license to sell your goods internationally? Do you think you’ll have to pay any additional costs for things like late freight, errors, or shipment cancellations? Have you considered all of the applicable taxes for your specific jurisdiction? All of these fees need to be considered and built into your landed cost.
Now, looking at the list above, it should be clear that this formula needs to be adapted depending on whether you’re looking at the landed cost of an individual item or for a group of items. You may want to look at the landed cost of a shipment, for example. It really depends on your specific business.
Landed cost example
Imagine you’re a clothing brand that sells Made in USA t-shirts. Each t-shirt costs $2 to produce and you sell them for $20. A nice $18 in profit per shirt, right? No, not quite. Let’s take a look at the landed cost.
$2 manufacturing cost per shirt
$1 transportation cost to your warehouse (no import fees as they’re made locally)
$2 flat rate shipping cost, basic insurance included
$.50 approximately in overhead fees for storage and your warehouse employee salary (fractionally attributed across all of your inventory)
$.88 Shopify transaction fee (2.9% + 30¢) — this assumes one t-shirt per transaction
$6.38 = Landed cost
There’s a 219% increase between your manufacturing cost and your landed cost in this example. That represents 25% of what you initially had marked down as profit—a significant difference to your profitability.
Why landed cost is important for ecommerce businesses
To make sure you’re profitable
Running a successful business means being on top of your finances. Landed cost is one of the best indicators of money going out—which is pretty important when you’re trying to calculate how much money is coming in. To make sure your business is or has the potential to be profitable, you need to be tracking your landed cost.
To determine your ability to scale
Every time you consider a new product, a new launch, a new campaign, a new discount, a new expense, then you need to consider that investment in relation to potential profits. Having your landed cost calculations on hand makes those decisions so much faster and easier. When you know how much you’re putting in, you know how much you can eat into profits in order to potentially generate longer term growth and scale your business.
To hold partners accountable
Going into a business relationship with a freight forwarding company or third-party logistics provider, you’ll always agree on upfront charges and fees. That doesn’t mean you shouldn’t still monitor those costs on a monthly basis at a minimum. Compare your estimated landed cost against your actual landed cost and look for discrepancies. If there are differences in what you expected to pay one of your partners and what they’re billing you, dive into the numbers in more detail.
This isn’t to say your partners will intentionally overcharge you or that there’s any malicious intent. You may find that you’re missing commitments, delaying shipments, or otherwise causing extra charges. But you want to be able to have those conversations and in order to get those explanations and adjust as needed.
To identify opportunities to optimize
Speaking of adjusting, you should always be looking for ways to optimize your logistics. Calculating your landed cost can show you where you’re investing the most money and where your estimates are frequently off. These are signals that you can use to then go and identify opportunities to improve. Maybe you’ll be able to find more affordable suppliers, work out preferable shipping rates, or work with an expert to decrease your duties. These things won’t fall into your lap—you need to hunt them down. And your landed cost is the perfect way to start.
How to improve your landed cost
Use inventory distribution
Someone has to pay for shipping, and getting things to customers’ doorsteps in less than two days isn’t easy. But inventory distribution can help you fill these needs while keeping your landed cost in check.
Inventory distribution is essentially the practice of locating your goods in multiple locations or warehouses so that they’re closer to your customers. Proximity means faster shipping times and lower shipping fees. In fact, distributing inventory can reduce shipping costs by as much as 25%. Those are savings you can pass onto your customers, creating a buying experience that keeps them coming back.
Take advantage of emerging technologies
It’s hard to improve your landed cost if you’re stuck working with outdated software and technology. Every single year logistics operations get more sophisticated. Though these emerging technologies often come at a cost, they tend to pay off tenfold over time.
From using AI to optimize your inventory distribution to using more cost-efficient methods of production on the supply side, finding the right technology can be a boon for your bottom line.
Find the right partners
Logistics is a huge investment—maybe the biggest for an ecommerce business. Finding the right partners can have a massive impact on your landed cost.
Does your 3PL have warehouses located close to your customer base? Do they have pre-negotiated rates with carriers? A “yes” to both of these questions can save you and your customers significant money. Are you a seasonal business that sees a lot of inventory turnover? Ensure your partners don’t charge extra for each inbound shipment or things will get pricey fast.
These are just a few examples, but there are dozens of considerations when it comes to picking the right partners.
Try to find freight and logistics partners that are experienced with ecommerce and your vertical specifically. You also want to find partners that seek out opportunities to optimize your logistics for you. You’re likely not a supply chain expert, but they should be. Who better to identify ways to save you money?
Let’s make it a soft landing
Now that you understand what landed cost is and why it’s important, you can begin trying to optimize yours.
If you want to improve your landed cost through inventory distribution, emerging technologies, and great partners, Shopify Fulfillment Network can help.
Shopify Fulfillment Network features include
- 2-day shipping coverage across most of the United-States
- Automatic inventory management and distribution
- Cutting-edge warehouse management technology and full Shopify store integration
- A partnership with freight forwarder Flexport to optimize your entire supply chain
- Easy, Shopify-managed returns
- No storage fees for items sold within six months
- No inbounding fees or seasonal fees
Ready to reduce your landed cost? Get started with Shopify Fulfillment Network.