Landed cost: formula, example, and how to price from it

Landed cost is the total cost of a product once it is in your warehouse and ready to sell: the supplier price plus freight, insurance, duty, brokerage and handling. For a distributor it is the only honest base for a price. A bearing invoiced at $9.50 can easily cost $11.60 by the time it is on the shelf, and every margin calculated from $9.50 is wrong by the difference.

The landed cost formula

Each part is per unit. The supplier price usually already is. Freight, insurance, brokerage and handling arrive as one bill for the whole shipment, so you divide them by the units they cover. Duty is a percentage of the customs value. The US charges it on the price you paid the supplier. The EU, the UK and many other countries add freight and insurance to that value first, so the same rate costs more.

A worked example

A distributor imports 2,000 6205-2RS bearings at $9.50 each. The shipment brings four more bills:

• Ocean freight and insurance: $2,640 for the shipment, so $1.32 per unit.
• Import duty at 4% of the supplier price: $0.38 per unit.
• Customs brokerage and warehouse handling: $800, so $0.40 per unit.

The landed cost is $11.60, 22% above the supplier invoice. On small, heavy or low-value items the gap is often much wider. A box of steel fasteners can double in cost between the supplier's dock and yours.

How to price from landed cost

Set the price from landed cost and a margin target. Divide the landed cost by one minus the margin you want.

Now look at what happens when the same 30% margin target is applied to the supplier price instead.

The quote looks like 30% and delivers 14.5%. Half the margin went to freight and duty that nobody put into the cost. If the difference between margin and markup is the most common pricing mistake, using supplier price instead of landed cost is the second.

What the supplier price already includes

How much you add depends on the Incoterm on the purchase order. It decides which costs the supplier pays and which ones land on you.

• EXW

  Collected at the supplier's door. You pay every cost after that.

• FOB

  Loaded at the origin port. Freight, duty and fees are yours.

• CIF

  Freight and insurance paid to your port. Duty and inland are yours.

• DDP

  Delivered with duty paid. You add only your own handling.

A DDP price looks expensive next to an FOB price for the same part, until you land both. Compare suppliers on landed cost, never on the invoice.

Mixed shipments: how to split the costs

Most containers carry more than one product. The freight bill has to be shared out across them, and the method changes the answer.

1. Collect every bill

   Supplier invoice, freight, insurance, duty, brokerage and handling for the shipment.

2. Pick a basis per cost

   Freight by weight or volume, duty by value, handling by units or cartons.

3. Spread and add per unit

   Each line gets its share, divided by its quantity, added to its supplier price.

4. Update the item cost

   Post the result to the item record before anyone quotes from the new stock.

Splitting freight by value is the easy shortcut, and it is wrong for most distributors. A pallet of cheap, heavy cast iron pulleys and a carton of expensive sensors can share a container. Split by value and the sensors carry freight the pulleys caused, so the pulleys look more profitable than they are and get discounted too far.

Most ERPs can do this allocation on the receipt. NetSuite and Odoo call it landed cost, Business Central uses item charges, SAP Business One has a landed costs document. The work is in setting the basis once and making sure every shipment goes through it.

Where landed cost goes stale

Landed cost is a snapshot of one shipment. Three things make the number on the item record drift away from the truth:

• Freight rates move. A container that cost $2,640 to ship in spring can cost twice that in autumn.
• A supplier paid in euros or yuan changes your cost every time the exchange rate moves, even when their price stays the same.
• When new stock lands on top of old, most systems switch to an average cost, and quotes priced from the old landed cost undercharge until someone updates the list.

The fix is to reprice from landed cost every time it changes, not once a year. An automated pricing tool watches item costs as receipts post and moves prices and margin floors with them, so a jump in freight reaches the next quote instead of the next quarter's review.