Any successful business will be hyper-focused on margins; but to fully understand your business’ financial health, you’ll need to account for every expense, including the extraneous fees associated with ecommerce fulfillment. Landed costs are easy to overlook, but they can make or break a direct-to-consumer brand’s profit margins.
The landed cost is the total cost of getting a product to the customer, including all sourcing, production costs, shipping expenses, overhead, risk, insurance, and so on. Total landed cost is the lowest price a company can sell a product for without losing money.
When determining logistics costs, it's important to factor in all expenses—not just the cost of the shipping label. These expenses include freight fees, carrier surcharges, customers and tariffs, risk variances, insurance, and more.
Business accountants will compartmentalize expenses based on their role in business operations. For example, expenses might be bucketed into categories like cost of goods sold (COGS), operating expenses, and overhead. Without factoring in all the elements of landed cost, the business could miss opportunities to improve efficiency, or worse, prioritize products that turn a low profit or incur losses.
Production costs are all the fees incurred to create a product for sale, including the purchase of raw materials and the fees paid to the manufacturer. Since landed cost is calculated on a per-SKU basis, the production cost should be the price per unit—not per order.
The product cost may also be called the cost of goods sold. Traditionally, COGS has not included fulfillment or shipping expenses, but many DTC brands opt to lump those expenses into their COGS because fulfillment costs have an enormous impact on their business model.
Shipping is a critical component of landed cost for any business, but it’s especially relevant for ecommerce brands that incur shipping fees on a per-order basis. When calculating landed cost, you should include all fees associated with moving product: freight fees to import inventory, carrier rates for ecommerce orders, carrier surcharges, packaging fees, and so on.
When shipments cross international borders, they incur customs fees. Freight shipments must pass customs at both the origin port and destination port. There may be harbor fees, levies, tariffs, taxes, brokerage fees, and duties to pay. At ports, there can also be storage and demurrage fees.
Companies can reduce their customs fees by using international warehouses—that way, they only pay customs on freight shipments, rather than incurring import and export fees on each individual order.
There is always a risk that demand will fall, creating overstock and forcing the company to offload inventory at a discount. Businesses should account for these potential losses as part of their landed cost.
Most companies will also insure their inventory and high-value packages—these expenses are also part of landed cost, as fees associated with quality assurance, safety stock, and compliance.
All overhead expenses should be included in the landed cost, whether the cost is fixed, variable, or semi-variable. Overhead includes warehouse maintenance or storage fees, utilities, packaging supplies and dunnage, licenses, and payment processing fees, to name a few.
Outsourcing fulfillment can convert some overhead costs from fixed to variable, so you only pay for the services and space you need. Learn how Good Life saved 30% in fulfillment costs by outsourcing to Airhouse.
To portray accurate profit and product margins, it's critical to understand all expenses.
While gross or profit margins are often used to signify the financial health of a business, product margins are an especially important consideration for scaling businesses because they indicate how much profit the company is turning on the sale of each unique product, which can help improve cash flow before a company is profitable.
Distribution costs have an enormous impact on a company’s revenue, so it’s important that the business understands how much it realistically must charge customers in order to turn a profit.
For example: a tennis brand might sell rackets for $50, with a COGS—including fulfillment and shipping costs—of $45. The company’s profit margin on the rackets would be 10%.
But let’s say the brand spends an additional $7 per unit on import tariffs and cargo insurance. When taking in the whole landed cost picture, the company is actually losing $2 per each racket sold. Realistically, the tennis company should be selling its rackets for closer to $60.
Calculating landed cost early and often can help keep a company in the black and maintain a positive relationship with customers. While raising prices is sometimes inevitable, most companies will want to avoid frequent price fluctuations so as not to frustrate consumers or drive them to competitors.
Some companies lose money by pricing accumulated overstock too low. While it's good to move old inventory, selling it below the landed cost incurs losses. The landed cost will help determine the lowest price a company can discount a particular product while still turning a profit.
Once businesses know desired retail prices and the lowest profitable price per SKU, it's easier to assign competitive prices and undercut other players in the market. To keep competitive prices profitable, it's also important to track cost fluctuations to source, maintain, or ship items.
When a business knows the landed costs of each SKU, it's easier to see which fulfillment methods are most efficient and which products are most profitable. This helps guide companies in deciding on services from warehouses and carriers, as well as informing product mix strategy.
To calculate landed cost, simply add the following expenses per each SKU: unit cost of each product + shipping and freight costs + customs fees + risk expenses + overhead.
The cost per unit, or CPU, can be found by adding all fixed and variable costs incurred to produce a product and dividing by the total number of units.
Although the equation to calculate landed cost is simple, gathering the necessary information can take some work. Depending on the size of the company, it may involve working with multiple departments.
Here’s an example of a landed cost calculation:
($10 CPU) + ($20 freight) + ($2.50 customs) + ($4 fulfillment and shipping) + ($3 risk and insurance) + ($2 overhead) = $41.50 landed cost.
To turn a profit, this company would have to sell this particular SKU for more than $41.50.
Landed costs can be reduced by maximizing efficiency across business operations. In particular, optimizing economic order quality (EOQ), reorder points (ROP), fulfillment strategy, and using a cost-effective manufacturer can go a long way in reducing costs.
Using a 3PL with an a la carte billing model that provides itemized receipts per order can provide greater insights into fulfillment costs per order, allowing businesses to optimize each element of the fulfillment process, from shipping methods to pick fees. Freight forwarding and achieving economies of scale can also reduce expenses across distribution channels.
Airhouse offers customized logistics solutions designed to empower ecommerce brands to scale. Talk to an Airhouse team member to learn more.
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