How to calculate the landed cost of a unit

The price on your supplier’s invoice is not what the goods cost you. In the shipment worked through below, 600 units invoiced at £5.06 each arrive with a landed cost of £7.84, and once the twelve that arrived broken and the eleven weeks the money spent in transit are counted, the figure that should go into a price is £8.15 — 61% above the invoice. A seller who priced off the invoice at a 40% target margin would have charged £18.89 instead of £25.13 and lost £6.24 a unit, or £3,669 of gross profit on one container. This page works the whole sum line by line, shows the three ways of splitting shared costs across a mixed shipment and what each does to the answer, and says plainly what landed cost cannot tell you.

What landed cost is, and what it is not

Landed cost is everything you spend to get one sellable unit onto your own shelf, ready to pick. Not the invoice price. Not the invoice price plus freight. Everything, divided by the units you can actually sell.

Landed cost per unit = (goods + freight + duty + clearance + insurance + inbound handling + cost of the money) ÷ sellable units

Three of those seven are usually missing when a seller does this sum in their head, and they are the same three every time: inbound handling, because the hours spent unloading, counting and repacking never appear on an invoice; the cost of the money, because stock bought in March and sold in June has had cash asleep inside it for three months; and the difference between units shipped and units sellable, because breakage and shortfall are absorbed by the units that survive.

It is worth being clear about what landed cost is not, because the two neighbouring numbers get confused with it constantly.

• It is not your unit cost for pricing. Landed cost gets the unit onto the shelf. Getting it off the shelf and into a customer’s hands costs more again — the platform fee, the postage, the packaging, the minutes to pack. Landed cost is an input to that sum, not a replacement for it.
• It is not a per-order cost. Freight is bought by the shipment and consumed by the unit, which is the entire reason this arithmetic exists: a shared cost has to be allocated before it can be useful, and how you allocate it changes the answer.

One thing this page deliberately does not do is tell you what duty applies to your goods. Duty rates, classifications and the paperwork around them are not arithmetic and they are not something a guide can answer for your products. The figure used below is simply the amount that appeared on a clearance invoice, which is where yours should come from too, and the person to ask about the rate is your customs agent or freight forwarder.

A full shipment, worked

Marlowe and Vane is an invented importer used to keep the arithmetic concrete; every figure below is illustrative and belongs to this example only. They have ordered 600 stoneware planters. The supplier invoices in US dollars, so the goods line carries an exchange rate, stated as an illustration rather than as a fact about any particular day.

Divide by the 600 units shipped and the landed cost is £4,706.60 ÷ 600 = £7.84. The invoice price alone was £3,033.60 ÷ 600 = £5.06, so the landed cost is 55.1% higher than the number on the supplier’s invoice. Everything that is not the goods comes to £1,673.00, which is 35.5% of the whole shipment.

Units shipped are not units sellable

Twelve planters arrived cracked. Nothing about the shipment cost changes — you still paid freight, duty and clearance on all 600 — but there are now 588 units to carry it:

£4,706.60 ÷ 588 = £8.00 per sellable unit

A 2% breakage rate added 2.0% to the cost of every surviving unit. That is not a coincidence, it is the mechanism: losses are always paid for by the survivors, and the right place to notice that is here rather than at the end of the year.

The cost of the money, which nobody invoices

Marlowe and Vane paid the supplier on order and the goods reached the shelf eleven weeks later. For those eleven weeks £4,706.60 was neither cash nor a sellable product. If the business values money at an illustrative 9% a year — use your own figure, whether that is what an overdraft costs you or what the same money would have earned elsewhere — then:

£4,706.60 × 0.09 × (11 ÷ 52) = £89.60, or £0.15 per sellable unit

So the figure that belongs in a price is £8.15. Against the £5.06 invoice price that is 61.2% higher, and the gap is made entirely of costs that were all real, all paid, and none of them visible on the document most sellers price from.

Splitting shared costs when the shipment is mixed

One product in a container is the easy case. The moment there are two, the shared costs have to be split, and the basis you choose changes the answer by more than most people expect.

Say the same container also carries 200 brass lanterns. The costs that belong to a specific product — the goods and the duty charged on them — stay with that product. Everything else is shared: freight £1,180 + insurance £46 + clearance £65 + port £88 + inbound delivery £70 + unloading £42 = £1,491.

There are three defensible ways to split it, and they give three different planter costs.

The planters weigh 2.4 kg each, so 1,440 kg; the lanterns weigh 5.1 kg each, so 1,020 kg; 2,460 kg in total. The lanterns were invoiced at 19.80 USD each, so 200 × 19.80 × 0.79 = £3,128.40 of goods value against the planters’ £3,033.60.

The planter’s share of the shared costs is £1.86, £1.45 or £1.22 depending on nothing but the choice of basis — a spread of 52% on the same shipment, the same invoice and the same goods. Carried into a price at a 40% target margin, that is a difference of more than a pound on the shelf price of a planter.

Which basis to use

There is no universally right answer, but there is a rule that resolves most cases: allocate on whatever actually drove the cost.

• Weight or volume is usually the honest basis for freight, because that is what the forwarder charged on. If your shipment is priced by cubic metre rather than by kilo, use volume.
• Unit count suits costs driven by handling: unloading, counting, repacking. Someone picked up each unit once, regardless of what it weighed.
• Goods value suits insurance, because that is what the cover was priced against, and it is the right basis for anything charged ad valorem.

Splitting the shared block three ways by cause is more accurate than putting all of it on one basis, and it is not much more work: freight and port charges by weight, handling by unit, insurance by value. What matters far more than the choice is consistency. Pick a basis, write down which one you picked, and use the same one next shipment. A landed cost that moves because the method moved is worse than a slightly crude one that stays comparable across a year.

The costs that arrive after the container does

The table above stops when the goods reach the shelf, which is the correct place for landed cost to stop. Four things then happen that are not landed cost but do belong in the price, and leaving them out produces the same error in a different place.

Storage, once the stock is standing still

If the 588 planters take eight weeks to sell and storage costs an illustrative £95 a month, that is £190 across the run, or £0.32 a unit. Where stock sits in a third-party warehouse this arrives as an invoice and is easy to see. Where it sits in a spare room it is invisible and is usually valued at nothing, which is a choice rather than a fact.

The exchange rate you actually got

The goods line above used 0.79 GBP to the dollar. The rate that matters is the one your bank actually applied on the day the payment left, including its own margin, which is frequently not the rate quoted on a screen. On a 3,840 USD invoice, a 2% difference between the quoted rate and the rate you received is £60.67, or 10p a unit. Take the figure from the bank statement, not from the currency converter.

Duty and clearance charges that arrive separately

Clearance charges frequently reach you days or weeks after the goods, on a different invoice from a different company. A landed cost worked out on the day of arrival is therefore usually incomplete. Either wait until every invoice for the shipment has landed, or work the figure twice — once provisionally to get the product on sale, and once properly to correct the price.

Rework, relabelling and repacking

Goods arriving in bulk packaging often need something doing to them before they can be sold: splitting a master carton, adding a label, replacing damaged outer packaging. Time it once and cost it at a rate you would accept. Two minutes a unit at £14 an hour is £0.47, which on 588 units is £274 — more than the duty in the shipment above.

What the gap does to a price

Put the corrected cost through the backwards pricing formula and the size of the error becomes concrete. Marlowe and Vane sell on a channel taking 10.5% of the order, with £0.20 of flat fees, £3.49 of postage and £0.60 of packaging, and they want a 40% gross margin.

At £18.89 the real gross profit is £18.89 − £1.98 of fees − £12.44 of cost = £4.47, which is a margin of 23.7%, not the 40% the seller believed they had set. The gap is £6.24 a unit, and across 588 sellable units that is £3,669 of gross profit that was never priced in — from one shipment, decided once, at the moment the price was set.

What landed cost cannot tell you

A landed cost is a good number and a narrow one. It answers exactly one question — what did it cost to get this unit onto my shelf — and the temptation is to make it answer several others it cannot.

• It cannot tell you whether the order was the right size. A bigger shipment spreads freight over more units and produces a lower landed cost per unit, which makes over-ordering look like an efficiency. It is not one if the extra units sit unsold for a year: the holding cost and the cash tied up are real and they are not in this sum.
• It is a historic figure, not a forward one. It tells you what the last shipment cost. Freight rates, exchange rates and supplier prices all move, sometimes sharply, and a price built on last year’s landed cost is a price built on last year.
• It cannot value your own hours honestly for you. The handling and repacking lines use a rate you choose. Choose zero and the landed cost falls and the work still happens. The number is only as honest as the rate you put in it.
• It says nothing about duty rates or classification. The duty figure here is a number read off a clearance invoice. What rate applies to your goods, and under what classification, is not arithmetic and is a question for your customs agent.
• It does not price the risk of the shipment. A delayed container, a rejected consignment or a supplier who ships the wrong thing all cost real money, and none of it is forecastable from a cost sheet.
• It cannot tell you what to charge. Landed cost sets a floor. What a buyer will pay is a fact about them, not about your freight bill, and a landed cost that comes out above what the market pays is a signal to stop buying the product rather than to raise the price and hope.

Once you have an honest landed cost, the next two questions are what to charge for it — how to price a product so it actually makes money — and what the platform will take back out of that price, which for the big three is worked through in what Amazon takes from an FBA sale, what Etsy takes from a sale and what Shopify costs per sale.

Arithmetic and general information only — not financial, tax, legal or investment advice. Your own figures, and your own accountant, decide what any of this means for you.

Frequently asked questions

What is landed cost?

Everything you spend to get one sellable unit onto your own shelf, divided by the units you can actually sell. That is the goods, freight, duty, clearance, insurance, inbound delivery and the hours spent unloading and repacking, plus the cost of having the money tied up while the shipment is in transit. In the worked example on this page a 5.06 pound invoice price becomes an 8.15 pound landed cost, 61 percent higher.

How do I calculate landed cost per unit?

Add every cost of the shipment, then divide by the number of units that arrived in a sellable condition rather than by the number shipped. In the example here 4,706.60 pounds of shipment cost over 600 units shipped is 7.84 pounds, but twelve arrived broken so the real divisor is 588, which gives 8.00 pounds. Add the cost of the money tied up for eleven weeks and it is 8.15 pounds.

How do I split freight across different products in one shipment?

By whatever drove the cost. Freight and port charges are usually best split by weight or volume, because that is what the forwarder charged on; handling by unit count, because each unit was picked up once; and insurance by goods value. In the worked example the same planter carries 1.86 pounds, 1.45 pounds or 1.22 pounds of shared cost depending on the basis, a spread of 52 percent, so pick one, write down which, and use it consistently.

Should landed cost include the cost of the money tied up in stock?

If you want the figure to be honest, yes. Money paid to a supplier eleven weeks before the goods can be sold is neither cash nor a sellable product for those eleven weeks. In the example that is 4,706.60 pounds times 9 percent times 11 over 52, which is 89.60 pounds, or 15 pence a unit. Use your own cost of money, whether that is what an overdraft costs you or what the same money would have earned elsewhere.

What happens if I price from the supplier invoice instead of the landed cost?

You charge too little and you do not find out for a year. In the worked example, pricing from the 5.06 pound invoice at a 40 percent target gives 18.89 pounds, while the real landed cost of 8.15 pounds needs 25.13 pounds for the same margin. At 18.89 the actual margin is 23.7 percent, and the 6.24 pound gap across 588 sellable units is 3,669 pounds of gross profit missing from one shipment.

Other guides

• How much does Etsy take from a sale?
• How to build a cash flow forecast
• Agency utilisation rate: the formula, and the denominator that decides it