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Landed cost is the total cost of getting a product to your warehouse, ready to sell, divided by the number of good units that arrive. It includes the product itself plus samples, setup, packaging, freight, insurance, duty, customs fees, inspection, receiving and a reserve for defects.
If you only take one money habit from product development, take this one: model margin from landed cost, not from the supplier's quote. Brands go under on products that looked fine on paper until the freight bill, the duty and the returns arrived. Do the boring math while you can still change the design.
01The landed cost formula
The formula is simple:
Two parts of it trip people up.
The denominator is sellable units, not units ordered. If you order 300 and 3% arrive damaged or defective, you have 291 to sell. Spreading cost over 300 gives you a margin that doesn't exist. On glass, ceramics, stone or complex garments, be honest about breakage.
One-time costs belong in the first order, not forever. Samples, tooling, patterns, screens and digitizing are paid once. Show a first-order landed cost and a reorder landed cost as two lines, so setup doesn't kill a good product or flatter a bad one.
02What goes into landed cost
Walk through every cost between the factory and your shelf:
| Cost | Examples |
|---|---|
| Product | The unit price on the quote, at the quantity you're ordering |
| Development and setup | Samples and revisions, tooling, molds, screens, embroidery digitizing, patterns |
| Labels and decoration | If they're billed separately from the product |
| Packaging | Polybags, hangtags, boxes, inserts, mailers |
| Inspection and testing | Third-party pre-shipment inspection, lab tests |
| Freight and insurance | Origin charges, the main leg by sea or air, delivery to your door |
| Duty and customs | Duty at your product's rate, any additional tariffs, broker fees, port and processing fees |
| Payment costs | Bank and transfer fees, currency conversion |
| Receiving | 3PL receiving, counting, labeling, put-away |
| Defect reserve | Units you can't sell, as a share of the order |
Costs after the shelf, like pick and pack, shipping to the customer, payment processing, ads and returns, aren't part of landed cost. They are part of your unit economics, and your price has to cover both.
03A worked example: 300 hoodies
Here's the method on an illustrative first order. The factory quoted $18.50 a unit FOB. By the time 291 sellable hoodies are on the shelf, each one has cost a little over $30.
04Incoterms change what is in the quote
Incoterms are standard shipping terms that say where the seller's cost and risk end and yours begin. Two quotes on different terms are not the same offer, even if the unit price looks lower.
| Term | The seller covers | You add |
|---|---|---|
| EXW (Ex Works) | The goods, ready at their door | Pickup, export clearance, all freight, insurance, duty, delivery |
| FOB (Free On Board) | Goods loaded on the ship at a named port | Ocean or air freight, insurance, duty, customs, delivery |
| CIF (Cost, Insurance and Freight) | Freight and basic insurance to your port | Unloading, duty, customs, delivery from the port |
| DDP (Delivered Duty Paid) | Everything to a named place, duty included | Very little, but you pay for it in the price |
FOB is the most common term for overseas quotes. Convert every quote to the same term before you compare, and remember a lower EXW price can be more expensive than a higher DDP one once you've paid for everything EXW leaves out.
05Estimating duty and tariffs
Duty depends on what the product is, what it's made of and where it was made. In the US, every imported product is classified under an HTS code (the US version of the international HS code), and each code has a duty rate. Additional tariffs can apply on top for some products and countries of origin, and those rules change.
- Find your likely code. Search the US International Trade Commission's HTS database (hts.usitc.gov) by product and material. A cotton knit hoodie and a polyester one can sit under different codes with different rates.
- Ask your supplier what code they export under. They deal with this every day. Treat it as a starting point, not an answer.
- Confirm with a customs broker before you rely on the number, especially for a first order or a product that could fit more than one code.
- Duty is usually charged on the customs value, typically the price you paid for the goods, not your retail price.
06Estimating freight
Freight is charged on weight or volume, whichever costs more. That's why packaging size matters as much as product weight.
- Get packed carton dimensions and weights from the factory early, for your actual units per carton. Factories often over-pack to protect goods, which adds volume. Ask whether a smaller pack is safe.
- Air is fast and expensive. Good for samples, small or light goods and rescuing a launch date. Price it before you promise a date that needs it.
- Ocean is far cheaper per unit at scale and slow. Plan weeks to months door to door, depending on route and season.
- Size the shipment. Shipping a few cartons less-than-container-load (LCL) costs the most per unit. A full pallet is cheaper per unit; a half or full container is cheapest, if you have enough product to fill it.
- Get a forwarder quote door to door, including origin charges, the main leg, destination fees and delivery. Ask your factory for its forwarder and get one of your own to compare.
07From landed cost to margin and price
Once you have landed cost, check it against every price you'll actually sell at, not just full retail.
| Price point | Price | Landed cost | Gross margin |
|---|---|---|---|
| Full retail | $95.00 | $30.33 | 68% |
| With a 25% discount code | $71.25 | $30.33 | 57% |
| Wholesale at half of retail | $47.50 | $30.33 | 36% |
Using the hoodie example above. Margin here is (price minus landed cost) divided by price. The wholesale line is where many brands get a surprise: a product that's healthy on your own site can be thin to a store. As a rough rule, if you sell direct and pay for ads and returns, landed cost should sit well under half of retail, often closer to a third.
Then add the costs after the shelf (customer shipping, pick and pack, payment fees, ads, returns) to see what each order really earns.
08Landed cost is not cash flow
A product with a great margin can still sink a small brand if the cash goes out long before it comes back. Map both directions:
- Cash out: sample fees, the production deposit, the balance, inspection, freight, duty and your launch spend
- Cash in: preorders, wholesale payments (often on terms, weeks after delivery), sales from your own site
- The gap: how many weeks between the deposit and the first meaningful revenue
- The fix if the gap is too big: a smaller first order, preorders, a lower deposit, a domestic run while the overseas order is in production
Run the whole model at three quantities: a small test, your likely order and the next price break. Then decide: go, no-go, or redesign the materials or construction until the numbers work.
QQuestions
Q01What is included in landed cost?
The product, one-time setup such as samples and tooling, packaging, inspection and testing, freight and insurance, duty and customs fees, payment fees, receiving and a reserve for defects, divided by the sellable units you receive.
Q02What is the landed cost formula?
Landed cost per unit equals the total of all costs to get the goods to your warehouse, ready to sell, divided by the number of sellable units received.
Q03Is landed cost the same as COGS?
Close, but not always. Landed cost is the cost to get a unit onto your shelf. Cost of goods sold is an accounting figure for the units you sold in a period, and what it includes depends on your accounting method. Ask your accountant how to treat freight and duty in your books.
Q04Does landed cost include shipping to the customer?
No. Landed cost stops at your warehouse. Pick and pack, customer shipping, payment processing and returns are selling costs, and your price needs to cover them too.
Q05How do I estimate import duty?
Find the HTS or HS code for your product, look up its duty rate and any additional tariffs for your country of origin, and apply it to the customs value. Confirm the code and rate with a customs broker before you rely on it.
Q06Is a DDP quote better than FOB?
DDP is simpler because the seller handles freight and duty, but you pay for that in the price and have less control. Compare the DDP price with your own FOB price plus freight, duty and fees before you decide.
→Where to go next
- Manufacturer directoryGet quotes to put in your model.
- Packaging manufacturersPackaging size drives freight cost.