For eCommerce startups and SMEs thinking about opening an import-export business, the maths to figure out how you’re going to make a profit becomes a bit more complicated than the calculations for a domestic outfit. It no longer suffices to worry about purchase price and shipping costs alone; instead, today’s entrepreneurs have to concern themselves with a whole slew of fees that get bundled together in what is known as the “landed cost.”
What is the landed cost?
The landed cost of an imported item is the total cost of purchasing the item, and getting it from its country of origin to the country in which it will be sold. A variety of fees make up the landed cost of imports, and the calculation breaks down into the following categories:
– Purchase Price: This is the cost of the item agreed upon by the buyer and seller, and the largest and most obvious component of the landed cost.
– Freight: This includes not only shipping by air, sea, rail or road from one country or another, but also getting the item from the warehouse or factory to the port of export. Typically, the landed cost includes all fees up to the port of destination, so carriage fees from the port of import to the final destination are not included.
– Loading: At each transfer – between truck and ship at the port of export, for example – loading and unloading fees may be tacked on to the overall tally.
– Insurance: Depending on the arrangement and contract, the buyer or seller bear responsibility for items lost, stolen, or damaged in transit, and thus in many cases an insurance policy on imported goods is advisable. If the buyer is responsible for the cost of lost or damaged goods, the insurance fees become part of the landed cost.
– Customs Duties and Import/Export Taxes: In most cases the taxes and fees at the port of import, imposed by the destination country, make up part of the landed cost. In rare arrangements, the buyer also has to cover export duties in the country of origin.
The arrangement agreed upon in the contract will determine how the costs and fees are divided up between the buyer and the seller.
Here’s the formula:
Incoterms and Common Arrangements
The responsibilities for these various fees are typically determined by International Commercial Terms (Incoterms), which are the internationally recognised terms of agreement used in import-export sales contracts.
Incoterms are indicated by a three-letter call sign (e.g. VAT and CIF) and are very specific about who is responsible for the goods at each stage in the journey from origin to destination. On one end of the spectrum there’s EXW (“Ex Works”) – in which the seller offers the goods at their factory or warehouse, but covers none of the costs associated with transit. These are uncommon contract terms since they make the landed costs exorbitant and potentially unaffordable for the buyer.
At the other end of the spectrum, you have DDP (“Delivered Duty Paid”), in which the seller gets the goods from their place of origin to the final destination, having covered all costs involved. In this case the landed cost would be nothing more than the purchase price, but this situation is also rare.
More commonly the terms fall somewhere in the middle, and can be divided into two categories; terms for any mode of transport, and terms for sea and inland waterways.
Any Mode of Transport
– FCA (“Free Carrier”): The buyer and seller agree upon a place in the country of origin where the buyer’s carrier will pick up the goods. The seller is responsible for getting the goods to that place, and getting them prepared for export (i.e. cleared by customs).
– CPT (“Carriage Paid To”): The seller is responsible for the goods all the way to an agreed-upon place in the country of destination. The buyer, however, is responsible for import duties and fees.
– CIP (“Carriage and Insurance Paid”): This arrangement is like CPT, but the seller is also obligated to purchase insurance while the goods are in transit. This is similar to CIF (see below) but used when multiple modes of transport are employed.
– DAT (“Delivered at Terminal”) and DAP (“Delivered at Place”): Similar to CPT, but the place of delivery is a specified terminal or location. The buyer becomes responsible at the terminal or location when the goods have been unloaded. In this case, the buyer also pays import and customs taxes and fees.
Sea and Inland Waterways
– FAS (“Free Alongside Ship”): The seller is responsible for the goods until they reach the port of export. In other words, they put the goods alongside the ship and prepare them for loading and export, but are not responsible after that. The buyer covers the costs of loading the goods, shipping them, and unloading at the port of import.
– FOB (“Free on Board”): The seller has to load the goods onto the boat, and then costs and risks are shared between the buyer and seller while the goods are on board.
– CFR (“Cost and Freight”): The seller is responsible for the item until it reaches the port of destination. The buyer, however, is responsible for the costs and risks of unloading the item from the ship.
– CIF (“Cost, Insurance and Freight”): This is basically the same arrangement as CFR except the seller is also obligated to purchase insurance for the journey between ports.
The landed costs of goods depend entirely on the Incoterms agreed upon by the buyer and seller.
Most common arrangements have the seller paying loading costs in the export country, and often the carriage costs between countries, while the buyer typically becomes responsible once the goods arrive in the destination country and has to pay for unloading and freight subsequently.
In almost all cases, the buyer is responsible for import duties and fees, and so these will become part of the landed cost.
Whatever Incoterms arrangement you agree upon, factoring the complete landed cost into your business model is a necessary component of launching your import-export business.
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