Landed Costing: What It Is and How to Calculate It
In the logistics industry, there are certain terms you'll commonly hear discussed in the conference room. Sometimes, certain folks (never you, of course) might give the impression they don't exactly know what they're talking about. It's as if they're peppering the conversation with "terms and -isms" just for flavor. In my experience, landed costing is one of these phrases.
Even though you frequently hear about landed costing, there's still a level of uncertainty. People around the office might debate what landed cost is, what it entails, and how it's calculated.
Our Mission Today
Today, our mission is to dispel the confusion about landed costing once and for all.
First, I'll provide the proper definition of landed costing and related terms. Next, I'll offer some examples for how to calculate landed costing, with increasing levels of spiciness. Then, we'll discuss some ideas for how you can take your game to the next level and reduce your landed cost.
At the end of the day, we should have all the information, know all the rules, and have all the pieces in place to dominate the next board(room) game. Let's go!
Terms to Know
- What is landed cost? Landed cost is the total or true cost of a product or shipment.
- Why landed cost is important: Landed cost is necessary to capture both obvious and hidden costs within the supply chain in order to establish correct sales pricing and/or actual margins.
- Landed cost includes the original price of the product, plus taxes and total cost of shipment.
- Total shipment cost includes freight charges, plus any extra fees for tarping, drayage, lumpers, weight tickets, customs, duties, taxes, tariffs, insurance, currency conversion, packaging, handling, and payment fees.
Landed Cost Sample Calculation #1: A Buyer's Landed Cost
Now that we have some basic terminology, let's take a look at how to calculate landed costing using an example from America's national pastime: online shopping.
Level of difficulty: mild
Say you just won the eBay auction on an angelic pair of Nike Jordan Flights EUC. Once you catch your breath and your heart stops racing from the thrill of the kill, your stomach drops. It suddenly occurs to you that when you factor landed cost, you could have afforded a brand new pair of knockoff All Birds—and still had money leftover for lunch this week.
In the eBay flip game, your total charge is actually made up of multiple charges. When you break those charges down, your total cost looks like this:
- Price (+$70)
- Taxes (+$5)
- Shipping/freight (+$25. Ouch!)
- Less any discounts (Ha! N/A)
The landed cost on your new eBay jawns is price + taxes + shipping - discounts = $100.
Landed Cost Sample Calculation #2: A Seller's Landed Cost
On the flip side, if you're the eBay seller, your landed cost equation is a bit more complex.
Level of difficulty: medium
The seller's landed cost looks like this:
- Sold price ($70)
- Shipping price ($25)
- Ebay %10 fees (-$9.50)
- Shipping Costs (-$24.75)
- Purchase cost of sold item at thrift store (-$15)
- Shoe paint and cleaning supplies (-$10)
- Your overhead and time (-$???)
The landed cost on the seller's side leaves you with a $35.75 profit—and that's before calculating the costs of time and overhead. It's a different story once you factor in overhead (a fraction of your rent, lights, heat, other utilities, taxes, insurance).
For more information on how to calculate overhead rate, look here.
Along with overhead, landed cost can also include your time costs. How much is your time worth?
OK, you get the picture. The total landed cost can leave only a small margin of profit, which is a bit more disheartening than you realized.
But again, that's exactly why we perform this calculation. The goal is to give you more and better information that allows you to build a tighter business case and make more informed decisions.
Landed Cost Sample Calculation #3: Logistics World
Now that we understand the general framework of landed costing, let's apply the same premise to the world of logistics.
First thing to remember, the principle of landed costing remains the same regardless of your business—the specifics just get more industry-specific.
Additionally, just as we saw with our eBay examples, landed cost in the logistics world can be calculated from both the buyer-side and the seller-side.
Level of difficulty: hot, but it's not really that bad
That being said, if you're in the logistics industry, you know how many moving parts there can be for every load of freight. The variability of each specific load can make your job of calculating landed cost even more difficult.
In the world of freight, there are fixed costs of operating the truck, which include
- Truck payments
- Driver salaries
- Permits and licenses
- Scheduled maintenance and tires
- Office overhead
There are also variable costs that depend on the specifics of each load:
- Scale tickets
- Emergency maintenance
- Lumper tickets
- Drayage or tarp fees
You get the picture: All of these costs must be factored in before you can determine profitability. For a more thorough checklist of possible fixed and variable costs associated with truck ownership, look here.
Up against so many cost factors, you can see how turning a profit is difficult. It's been said that freight is a game of pennies and a game of organization.
With so many moving parts with each truck and each load of freight, technology has found a purpose. Some recent innovations developed by the tech world are really changing the game and making life easier in the freight world.
For instance, look again at the list of variable costs shown above and ask yourself this: What does everything have in common? Receipts.
Each fuel-up, meal, lumper, and truck scale comes with a coinciding cost-bearing event:
- Actual cost of the driver's burger
- Completion of expense report
- Organizing the physical paper trail/hard copy of each receipt
- Process of turning all physical paperwork in to the back office
- Back-office data entry
- Invoicing the customer for the load and recouping billable events
Previously, the everyday cost-bearing actions that I just listed were a headache to track. The tracking of activities alone is a time suck that leaks money. When I heard about some new tech products that make tracking all paperwork easier, my ears perked up.
As such, tech companies have recently developed mobile capture imaging software. This software streamlines the process of gathering the paper trail into one click of the camera on a driver's smartphone. Leading the pack in this is a company named Vector, whose imaging software is considered best in class.
Balanced against all factors, it's incredible how much paperwork truck drivers have to deal with. In my experience, drivers like to drive, not shuffle paperwork. To put it another way, do you really want to hinge your bottom line on the organizational skills of your drivers? Instead, wouldn't it be better to make life as easy as possible for your drivers?
To summarize, today we looked at the definition of landed cost and a few examples for how to calculate it. That being said, if you want to dominate the next board(room) game, you have to think beyond simply defining and calculating landed cost.
In brief, I encourage you to raise your game, kick things up a notch, and begin looking for ways to reduce landed cost.
Look into imaging software solutions. The future is a paperless office, and imaging kills several birds with one stone. Reduce your landed cost. Like they say, a penny saved is a penny earned.
This post was written by Brian Deines. Brian believes that every day is a referendum on a brand’s relevance, and he’s excited to bring that kind of thinking to the world of modern manufacturing and logistics. He deploys a full-stack of business development, sales, and marketing tools built through years of work in the logistics, packaging, and tier-1 part supply industries serving a customer base comprised of Fortune 1000 OEMs.