Have you ever gone to purchase something online but end up re-thinking your decision because of all the additional costs that end up getting added at the end? For example, you thought the price of a new outdoor grill is $258.99. When you went to check out, the store asked you to pay $301.99. The price of the grill is $258.99 but by the time the delivery truck brings it to your door you’ve paid $301.99. That $301.99 has a name: Landed Cost.
What are landed costs? Landed Cost stands for the full cost of a product, once it has made it to your possession. It is not only the cost of the product itself, but it has added to it all additional costs. Think transportation fees, taxes, duties, insurance, currency conversion, etc. In a Landed Cost, all these costs are added to the actual price of the item you are buying. Landed Costs are typically used in the context of replenishing the stock of your business.
Why Do I Need Them?
Calculating landed costs is an important part of any business owner’s planning. It will help you determine if your product pricing is competitive and profitable for your business. Setting a price too low or too high will damage your business. Pricing your products accurately is considerably more difficult if you don’t have a clear understanding of your landed cost.
Further, this process will give you a clear overview of your supply chain. You can use it to compare different vendors and their charges. That way you can examine which one is more profitable and valuable to your enterprise.
It will also help you make an informed decision for your business. For example, in your search for inexpensive raw materials, you may find that they are cheaper to purchase from a foreign country instead of domestically. That is until you take into account all the extra fees like customs, transportation fees, and insurance to get them to your facilities.
Knowing the true costs of your products helps on many levels, e.g. knowing how to price your products, knowing how much value you have locked in your inventory, how to pick a proper supplier, etc. It’s key to invest in tracking these figures!
How Do You Calculate Landed Costs?
Each Landed Cost you add to a purchase order gets divided by the individual items in the order. Normally a single order will have multiple landed costs added to it.
Here’s a simple example of how math works. Let’s say you are an apparel manufacturer and are buying fabric from a supplier overseas. You have made a purchase order for 40 units (say rolls) of fabric.
The price your supplier is asking per roll is $20/roll. This means you are paying your supplier 40 x $20 = $800.
Shipping: $100 for the shipment of 40 rolls ($2,5/roll)
Customs: 3% for the whole order, which is $0,60/roll
Insurance for shipping: $80 for the shipment, which is $2/roll
Conversion rate and service fee: $1,6/roll
Landed cost you will be paying for each roll of fabric:
So instead of paying $20 for one roll of fabric, in reality, you are paying $26,70. This will bring the full cost of your order to $1068 instead of $800 which is a big difference and you’ll want to know about the extra $268 expenses.
This example is for a simple case – the more complicated your process is, the more steps this calculation will have. But don’t worry, when you add Landed Costs to your Megaventory workflow, you don’t need to process a single equation – the app will do it!
If you’d like to know about other ways to calculate landed costs, let us know! Together we can find the best way for you to handle this.
Getting Started With Landed Costs in Megaventory
The first thing you need to do is create a shipping and handling bill document for each type of extra cost you have.
To create a shipping and handling bill go to Document Templates → New Document Template and fill in the document.
Create such a document for each extra cost, eg. freight, customs, currency conversion etc.
How To Use Shipping and Handling Bills
When a purchase order has been invoiced, you can issue the relevant shipping and handling bill documents to go with the bill of the purchase order. If there are multiple extra costs, you can add multiple documents.
Now that you’ve issued all the relevant shipping and handling bills to the bill of your purchase order, Megaventory will calculate the full Landed Cost for you. So easy.
To see what shipping and handling bills have been attached to a purchase order bill, just check out the “Related Documents” section. You can also cancel an irrelevant document from there if you’ve made a mistake.
Are Landed Costs for Me?
Now, you’re probably asking if this is something you truly need. The answer depends on what your situation is and what kind of businesses you partner with.
If you import goods and have to through customs, it is an important part of staying on top of your expenses. The other scenario where calculating landing costs is imperative is if you collaborate with courier or shipping services within your own country, and these other businesses handle your goods in the process.
Also, It is an additional layer of work but at the same time, calculating Landed Costs provides an added layer of information to your business. That additional information will help you make more informed decisions.
Lastly, whatever sort of business you run, if the number of goods coming in is high, you’ll definitely want to consider adding Landed Costs to your workflow. The more accurate you are with high volumes of goods the better. Accuracy really does make the extra overhead worth it.
Let’s Do This
If you don’t already use Landed Costs, or order and inventory management altogether, now is the best time to start using it! Megaventory makes calculating Landed Costs easy.
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Irene Dimakides does Digital Marketing and Content Creation for Megaventory. Her passion is to see people and businesses reach their full potential and move forward in that more freely. When she’s not writing the next piece of original content, you can find her at the beach with a book or getting food with friends.