Your supplier quotes $100 a unit, you price off that number, and later you wonder where the margin went. Kelley Birrell separates buy cost, which is the price tag from your supplier, from landed cost, which is what the product costs once it reaches your warehouse. She then follows a gadget shipment through inland transport, two rounds of customs, ocean freight, and warehouse receiving, adding roughly $10,000 to a $10,000 order.
Inventory & COGS
Inventory Landed Costs Explained | What's Included and How to Calculate It
4 min
Transcript
0:00 Buy costs versus landed costs
Hey there, ecommerce business owners. Have you ever found yourself puzzled about the differences between buy costs and landed costs? In today's video, we'll unravel the differences between buy costs and landed costs, and we'll also follow a product through its shipment process so that you can see where those costs come into play.
I'm Kelley from LedgerGurus and we are all about ecommerce accounting. Now, we understand that this process can be a little bit tricky and we are here to guide you.
Buy costs are your starting point. They are the initial cost of purchasing the product. Essentially, they are the price tag from your supplier. Landed costs, on the other hand, are the total costs of your product once it reaches your warehouse. It adds things like shipping and customs and taxes and fees and all of that. To sum up, buy costs are just the beginning, but landed costs follow the entire journey of your product from the supplier to your warehouse.
0:48 Why the difference matters
Understanding buy costs and landed costs for businesses is crucial, and here's why.
First, it allows for detailed tracking of expenses, ensuring an accurate profit margin. This helps to determine which ones are your most profitable products.
Second, it aids in competitive pricing strategies, especially for those sourcing globally. This is vital to factor in all of these costs.
Lastly, it's key for strategic sourcing. Knowing your costs can lead to better negotiations and strategic sourcing. In short, mastering these costs is essential for a healthy bottom line and long-term business success.
1:22 Following a gadget from supplier to warehouse
Let's visualize this with a story. Imagine a product, say an electronic gadget, and we are going to follow its progress from the supplier all the way to the warehouse.
So it starts at the supplier location where the product is manufactured or sourced. For our story, the initial buy cost is a hundred dollars for a hundred gadgets, totaling $10,000. The product is then manufactured and packaged at the supplier's facility. At this point, there's no added costs.
Next, the product is transported to the nearest shipping port. We're going to say that this transport cost is about $500 to transport all 1000 gadgets.
At the customs checkout, our product goes through clearance, and at this point we are getting a hefty customs fee of $1000.
Our product then embarks on its international journey, being loaded into a container ship. The international shipping cost is going to set us back about another $2,000.
Upon reaching the destination country's port, now it goes through another round of customs and fees, and this is going to cost us about another $5,000.
Finally, our product arrives at the warehouse. The transportation cost from the port to the warehouse is a thousand dollars, and then the warehouse has to receive it, and that's going to cost us about another $500.
And there you have it. That's how our product incurs all of its landed costs as it moves from the supplier to the warehouse.
2:42 Free template and IMS help
So do you want some help in being able to figure out where all of these costs are coming from and being able to pull it all into one place? We have an inventory and COGS template, and it's a free download that you can then input all of these costs in, and it can bring it together and help you to get accurate landed costs.
Also, if you're interested in implementing an inventory management system, we can help you with that too.
And that's a wrap on the differences between buy costs and landed costs. If that was helpful for you, make sure that you give us a thumbs up and subscribe for more ecommerce insights.