Whether you head up e-commerce or shipping initiatives at a global company, learning about a landed cost method can boost your bottom line. In this article, I explain what a landed price is, why it is essential in global trade and how you can put it to use to increase your profits.
A landed cost is the total price of a product once it has arrived at a buyer’s door. The landed cost includes the original price of the product, all transportation fees (both inland and ocean), customs, duties, taxes, insurance, currency conversion, crating, handling and payment fees.
How to Calculate a Landed Price
The traditional way of calculating a landed cost is as follows. You prepare what is called a proforma invoice, showing all the familiar components of an ordinary domestic invoice: a description of the product, an itemized listing of charges and sales terms. Let’s say you want to get your customer in New Zealand a landed price quote per unit for two pairs of trekking boots to his home in Auckland. Here’s a look at how you would prepare a proforma invoice on this sale.
You have 2 pairs of trekking boots, each priced at $150 per unit. Total cost for the order is $300.
- Selling price: $300 in U.S.A.
- Inland transport: $9
- Ocean transport: $22.50
- Duty: $5
- Currency Adjustment Factor (CAF): $5.50
- Documentation: $2
TOTAL LANDED PRICE to Auckland: $344.00
The selling price is your cost plus profit. Add that figure to the total shipping costs and other fees, and divide that total by two to get you your landed price per pair of boots (in this case $344/2 = $172/pair). You have now finalized your price quotation and created a proforma invoice for your buyer. From this point on, no additional changes should be made to the transaction by you or your customer until after the expiration date given on the proforma. What that means is this: You maintain control over your profits, and the buyer knows exactly what his costs and profits will be as well. Everyone wins. Before you release the order though, you and your customer must negotiate terms of payment. There are many factors to consider when choosing an export payment method. Be sure to examine all of them before finalizing your transaction.
Now that you understand the complexity of developing a landed price for your buyer, here are three other critical points worth highlighting:
- Had you left the terms of sale open on how the goods would be delivered to Auckland, your buyer would not be able to determine precise costs associated with the transaction. Hence, both parties — you as the seller and your buyer — would have less control over the transaction and a much wider variance on profits. Imagine your buyer attempting to take control over every aspect of moving the goods from your factory door to his. Think costs would escalate? You bet, due more than likely to inexperience in arranging international shipments. To remain globally competitive, it is your job as the seller to lower the final selling price by reducing the cost of each or any component part of the landed cost calculation or increase the margin associated with the sale in some other capacity. The one surefire way to accomplish that is the landed cost model.
- What if you could have landed costs automatically calculated for you online? That is not as far-fetched as it sounds. Pitney Bowes has a solution that does exactly that. Check into it.
- Not knowing all the real costs associated with an international sale can cause a buyer to abandon a deal. How many times have you been ready to buy a product online, only to find out right near the end of a transaction that the shipping costs either cannot be calculated accurately or are way higher than expected? Whether online or via the issuance of a more traditional proforma invoice, a landed pricing method removes the surprise factor for buyers, holds margins steady and maintains a positive experience for your customer.
When it comes to global trade, controlling costs, ensuring timely deliveries and getting paid are serious issues that every international business executive must face. Landed cost is a significant component of all of these issues. That is why establishing a landed cost model for overseas buyers is not just important, it is essential.
If you’d like to learn more about e-commerce methods and developing landed costs, visit Pitney Bowes Global Ecommerce Solutions or sign up for the blog newsletter (top right corner).
Laurel Delaney runs Chicago-based GlobeTrade.com, a leading management consulting and marketing solutions company dedicated to helping entrepreneurs and small businesses go global. She is the creator of The Global Small Business Blog (http://www.globalsmallbusinessblog.com), ranked No. 1 in the world for entrepreneurs and small businesses interested in going global. She is currently at work on a new book on exporting to be published February 2014. You can reach Laurel at firstname.lastname@example.org.