When you run an eCommerce business, you haveto know exactly how much every item costs. Unfortunately, this isn’t alwayseasy, especially when the cost of getting products to their destinations varieswith each and every product. This is why landed cost is such an importantconcept for eCommerce business owners to understand and use when calculatingexpenses and profits.
When you run an eCommerce business, you haveto know exactly how much every item costs. Unfortunately, this isn’t alwayseasy, especially when the cost of getting products to their destinations varieswith each and every product. This is why landed cost is such an importantconcept for eCommerce business owners to understand and use when calculatingexpenses and profits.
But what does landed cost mean? How doeslanded cost affect eCommerce businesses? How is it calculated? Is there aspecific formula? Finally, where can you find high-quality bookkeepingsoftware to calculate landed cost for you?
In today’s guide, we will answer all of thesequestions and more, but first, let’s look at the definition of landed cost tobetter understand the concept:
In layman’s terms, landed cost simply meansthe total cost of a product once it has arrived at its destination. ForeCommerce businesses, this typically refers to all of the costs the businessincurs to procure and ship a product to the customer. Naturally, the meaning oflanded cost may seem quite broad at first glance, as it encompasses a widerange of expenses, from manufacturing costs to storage and shipping (andeverything in between).
Due to the complexity of calculating landedcost manually, some small to mid-sized eCommerce businesses forego thecalculations and simply rely on approximations. It goes without saying thatthis is a very risky method, as it makes it virtually impossible to know theprofitability of your business. For this reason, it is best to take the time tofigure out your landed cost and then automate the calculation process.
That said, some businesses may find landedcost calculations easier than others. For instance, if your eCommerce businesssells directly from a single website, uses drop shipping or a 3PL warehouse,and only sells within a specific country, region, or state, it may greatlysimplify the landed cost formula you’ll need to use. On the other hand, if youoperate through multiple selling platforms like Amazon, eBay, Walmart alongwith Shopify, you sell products outside of the country, and you manage your ownshipping and transportation costs, then the calculations will be far morecomplex and difficult to track.
Landed cost isn’t just one more way to look atyour expenses; it allows you to calculate the total amount you’re spending onproducts. Having an accurate calculation of your total investment in productsallows you to compare your expenses to your revenue and analyze your businessprofits.
Ideally, eCommerce businesses should becalculating landed cost before shipping any products. In doing so, you canensure that you’re not spending more than you’re earning or overestimating yourprofits. Naturally, you may find that the actual landed cost differs from yourinitial estimates, which is why it is important to check the numbers againafter you’ve shipped your products.
Landed cost doesn’t just affect your abilityto analyze the relationship between revenue, expenses, and profits. Sincelanded cost includes all fees and costs along the supply chain, it helps youunderstand exactly where you’re money is going. This, in turn, can help youbetter manage your business. Landed cost is particularly crucial for thefollowing:
● Pricing - As an eCommerce business, you alwayshave to find a balance between competitive pricing and profitability. If yourprice points are too low, you’re simply not making enough revenue to justifythe costs. Alternatively, if your prices are too high, you’ll almost certainlylose customers to your competitors. Landed cost helps you understand exactlyhow much room you have to change your pricing model to remain both competitiveand profitable.
● Overhead Planning - Your overhead expenses allcontribute to your landed cost. When you see how much your expenses eat intoyour profits, you may decide to take a second look at exactly what yourbusiness really needs. You may find that cutting overhead costs now is the bestway to increase profits and actually grow your business for the future.
● Ordering - A large percentage of eCommerce businessesdo not manufacture their own products. Instead, they order them directly frommanufacturers or wholesale retailers. Either way, your landed cost will helpyou determine how much of a given product you can afford to order, includingall associated fees, taxes, and freight charges.
● Shipping Management - Shipping costs are justone piece of the landed cost puzzle, but they also happen to be a particularlyimportant piece. Many eCommerce businesses benefit from having relatively lowoverhead when compared to a traditional brick-and-mortar business. Shipping isthe one major exception. Every eCommerce business that ships physical productshas to manage shipping costs in one way or another. By analyzing your landedcost over the long term, you can make better and more cost-efficient decisionsrelated to how you ship your products.
It is very common for eCommerce businesses torely on data like Freight on Board (FOB) or Cost of Goods Sold (COGS), butthese don’t provide a complete picture of your total investment in products. Inthe context of an eCommerce buyer, FOB cost simply refers to the amount you payto acquire products. COGS is a bit more thorough, as it includes all of thedirect costs related to creating or acquiring products, including rawmaterials, labor, and overhead costs.
Landed cost incorporates and expands on thesetwo figures by including all costs related to shipping the product toconsumers. Consequently, landed cost is by far the most comprehensive and accurateway to determine how much each product costs your business.
As can be expected, there is noone-size-fits-all landed cost formula. The factors that need to be includedwill vary from one business to the next. For example, if you need to learn howto calculate the landed cost of imported goods from China, your calculationswill require you to consider dozens of different factors. That said, eCommercebusinesses can generally expect to include some or all of the following costsin their calculations:
● Manufacturing or acquiringproducts (including customs and import costs)
● Shipping products to consumers
● Overhead (including labor andpayment processing)
● Taxes and fees
● Insurance and compliance
The total sum of these costs added togetherwill give you your landed cost. To have a better visual of the landed costformula, here is an example:
Cost ofproduct + shipping + overhead + taxes + insurance/compliance = fully landed cost
Oftentimes, the hardest part of determininglanded cost is calculating the percentage of larger expenses to attribute to asingle product. For example, let’s say that you incur $1,000 per month inoverhead for your business. How much of that $1,000 should be used to calculatethe landed cost of a single product? This is one of the main reasons thatcalculating landed cost manually is simply not a worthwhile option. It isbetter to automate the process with a landed cost calculator or high-qualitylanded cost software.
Nonetheless, we will still look at a landedcost example using some common variables:
● Product: $15 per unit
● Shipping: $5 per unit
● Payment Processing: $1 per unit
● Taxes: $2 per unit
● Insurance: $3 per unit
By adding all of these amounts together, weget $26. This is the total landed cost for each product. In other words, youwill need to charge more than $26 per unit to make a profit.
Trying to do your own landed cost calculationsin Excel is tedious, and hiring an accountant can be expensive. If you want afast and easy way to automatically calculate your landed cost across multipleselling platforms, you can’t go wrong with ConnectBooks.ConnectBooks syncs all of your selling channels and automatically calculatesyour landed cost per product with the click of a button. To get an even bettergrasp of your business finances, ConnectBooks also generates accurate profitand loss statements, inventory tracking data, and much more.
Are youin need of comprehensive solutions to calculate landed cost in eCommerce? Doyou want to learn more about managing all of your eCommerce channels in oneplace? If so, reach out to the experts at ConnectBooks for more information!
