How to calculate landed cost per product when importing

Ask an online store what its products cost, and the answer is often the purchase price plus 25%. Or 30. That isn't because anyone thinks freight and duty are free. It's because working it out properly is a hassle. The freight invoice arrives three weeks after the goods. The duty comes on a separate invoice. The supplier wants dollars. And all of it has to be split across 40 different SKUs.

So you add a percentage on top. Over a whole year it is often roughly right. The problem is the individual products, and those are the ones you set prices on.

What goes into landed cost?

Everything it costs to get the product from the supplier into your warehouse. That is what landed cost means, and in Shopify it goes in the Cost per item field.

First the price of the goods, converted at the rate you actually paid, not the one that applied on the day you ordered. Then the freight, including the local charges at the ports, to the extent you pay them yourself. How much that is depends on the Incoterm you agreed with the supplier. I have written about that in Incoterms explained for online stores. After that comes duty, the fee to whoever clears the goods through customs for you, and the transport from the port to the warehouse if it isn't included in the freight price. If you insured the shipment, the insurance goes in too.

Import VAT, on the other hand, should not be included. If you are VAT registered, you get it back as input VAT, so it hits your cash flow and not your cost. Ask your accountant if you are not sure how it works for your business.

Freight is where most people get it wrong

Duty is actually the easy part. It is worked out product by product anyway, because each product has its own rate based on its commodity code. In the EU, duty is calculated on the value of the goods plus the freight up to the EU border.

Freight is harder, because it comes as one amount for the whole shipment. The most common mistake is to split it by value. That seems logical, but the forwarder charges for space and weight, not for what the goods are worth. Split it by value and the small, expensive products get too much freight, while the large, cheap ones get far too little.

So split the freight by whatever it was priced on. For LCL that is almost always cubic metres. Fees such as customs clearance aren't tied to any particular product, so you can split those by value. The main thing is to do it the same way every time.

An example

The figures are made up for the example, and so are the duty rates. You find the real rate for a product in the EU's customs tariff, TARIC.

Imagine an LCL shipment from China to Aarhus with two products. Product A is large and light. Product B is small and heavy.

Freight costs 1,900 kr. per cubic metre all the way to the warehouse, 12,540 kr. in total. Customs clearance and the other fees come to 1,200 kr.

Product A takes up 6 m³ and so gets 11,400 kr. of the freight. Product B takes up 0.6 m³ and gets 1,140 kr. The duty on A is 4% of 16,000 + 11,400 kr., which is 1,096 kr. Strictly speaking, only the freight up to the EU border should be included, so the real duty is a little lower, but I include all of the freight to keep it simple. B has no duty. I split the fees by value, so A gets 320 kr. and B gets 880 kr.

The whole shipment came to 74,836 kr. for goods worth 60,000 kr. That is just under 25% on top, so the rule of thumb was actually spot on for the shipment as a whole.

But product A costs you 144.08 kr. a unit, not the 100 kr. the percentage says. It looks like it earns more than it does, and it could easily be selling at a loss without you noticing. Product B costs 115.05 kr., not 137.50 kr. That is room in the price you don't know you have.

When should you work it out?

When the last invoice for the shipment has arrived. That is often weeks after the goods are in the warehouse, and it is probably the biggest reason so many people skip it. If you still have stock from an earlier shipment, enter a weighted average of the old and the new cost in Shopify.

And do it for every shipment. Freight rates move so much that last year's figures don't tell you much about what the goods cost today.