Understanding Landed Costs for Ecommerce

Elspeth From A2X (00:00)
Hi everyone, we're joined again today by Phil Oakley from Outserve, one of the UK's top ecommerce accounting integrators. They work with a number of well-known Amazon and Shopify brands here in the UK and help them to get their numbers right. So in this video, we're going to be talking about calculating your landed costs, and that's the true unit cost and it feeds straight into your cost of goods sold calculation. It's really important to get this right, because if you miss even a pound here, just about every other number in your business is going to be slightly out of whack. So Phil's going to help us with this today. He's a real subject matter expert in this area. First of all, Phil, quick intro—tell us a little bit about yourself.

Philip Oakley (00:44)
Yes, thank you very much. My name is Philip Oakley. I'm the owner–founder of Outserve and Outserve is a specialist team helping scaling ecommerce and product businesses really understand their numbers and be able to make strategic decisions based on actionable data. And as you say, Elspeth, we work with some great UK ecommerce brands, but also we've got clients in America, Australia, and of course we see so much importing and exporting — stuff being moved around the world from components being used in manufacturing to complete finished goods made in China and various other countries. So this is a lot of our world and we spend a lot of time thinking about landed costs and making sure that our clients really understand what is the total cost of the products that they're selling.

Elspeth From A2X (01:36)
Yes, okay, great. So Phil, before we get into the detail of landed costs, first of all tell us exactly what landed costs cover and why it's so important for ecommerce brands to get it right.

Philip Oakley (01:52)
Yeah, I think so. When we think about landed cost, it's not obviously just the cost of the product that you're buying. When you order that item — maybe as a loose example — if you're in the UK or you're in the USA and you're ordering from China and you understand that that product is going to cost you $10 a unit, that's great and you think about how much you're going to sell it for and how much profit you're going to make. But of course there's going to be additional cost. If it's coming from China, it's probably going to come in a container, and that container's going to have transport costs. Certainly we would think today if it was going into the US and many other countries, it's going to have a tariff — maybe the tariff is a percentage which is actually going to be charged as an import duty. All of this cost is going to come to the business and it's going to start to erode that profit. What we really need to do to help businesses make strategic decisions is actually work out for every unit that maybe has cost them $10 how much it has cost them in total to get it from their supplier's door onto their shelves — and really understand attributing the amount of duty and the amount of freight per unit. Because once we've got that, what we would call that landed cost as it's landed at your door, that's going to allow us to calculate real margin, real profitability. And of course that's going to dictate so many strategic decisions — how much money you can spend on advertising and marketing, on those PPC ads like on Amazon and the other channels, what channels to sell it on. It really is the anchor of so many strategic decisions in your business.

Elspeth From A2X (03:33)
That's great. So I guess we'd say that the calculation is everything it takes to create that product, to bring it to market, divided by the number of units in the shipment. That's how you'd get to a cost value. Would that be correct to say?

Philip Oakley (03:49)
Yeah, I think one of the phrases we've seen and heard before is sort of "all in until it's in." So all of the costs up to the point from that supplier's door until you've got it on your shelf and any costs attributable to that, whether it be freight costs or cargo insurance, anything that you've had to pay specifically for that item. And again, think about if you hadn't bought that item — would you have had that cost? If you've got that cost because you bought that specific item, then that is usually included in landed cost.

Elspeth From A2X (04:27)
Okay, so once you've worked out what your landed cost is per unit, how does that number then feed back into the cost of goods sold calculation?

Philip Oakley (04:37)
So I think that's obviously one of the starting points of really understanding what the cost of goods sold is. Clearly in manufacturing and many goods there's other costs to add on and you need to decide what is in there. All we're trying to do at this point is get a very, very clear picture of what your gross profit margin is. It's all about the profit that you can make on that product and really understanding what that number is. And again, making strategic decisions — for many businesses, probably the landed cost of that product will be most of the cost of goods sold. For manufacturing businesses, or businesses that are involved in anything to create that product into its final sellable product, those costs will need to be included at that point. So there could be labour costs within a business which are directly going into packaging that product, maybe putting the products together, maybe assembly — anything that really gets it to that point where you go, right, it is now sellable and it's ready to sit on a shelf. Even if that's the warehouse shelf ready to be picked for ecommerce, anything that gets it into that state to be sellable is cost of goods sold. But of course there are many things that are expensive for a business that are not in cost of goods sold.

Elspeth From A2X (05:57)
Okay, so obviously with ecommerce, which we've already touched on, we've got a lot of cross-border activity going on. My understanding is that that then adds extra layers to that cost calculation. Maybe you could talk to us a little bit about that and what you see with the businesses that you work with.

Philip Oakley (06:15)
Yeah, so I think it does. As soon as something's moving around from one country to another, it's nearly 100% you can rely on the fact that somebody will have added some cost on there somewhere. And sometimes these fees actually will take some time to come in. So you might straight away have ordered something at $10 a unit, but you might not know the exact duty that you're going to pay or even the final freight costs until much later. That time lag can give challenges to accounting because we really want — sometimes you've even sold products before you fully understood what they cost you because it takes so long for some of the freight forwarders, some of the freight companies, the duty invoices to come through. And that is a challenge, which is why more focus needs to be given to this. We've seen so many businesses actually be selling things, thinking they're making a very good profit, for weeks if not months, and then duty and freight invoices turn up which have effectively eroded nearly all of that profit. Certainly when freight and other costs can be quite volatile, tariffs can change very significantly in a short time. So at the point that you actually order the product you may naturally not know the full tariff percentage and what the import duty will be until a later time.

Elspeth From A2X (07:53)
And would you say that currency plays into that as well — kind of the currency swings that we see month to month?

Philip Oakley (08:00)
Yeah, absolutely. Obviously some people protect themselves, maybe hedging and forward contracts on currency, but many people will still commit a purchase order, maybe say for example to China in dollars — very popular in the UK to do that — but the exchange rate may have significantly changed by the time it comes to pay the invoice. If they haven't actually got dollars in an account and they need to exchange at the time of payment, that can end up costing them something significantly different. All these small percentages may sound small — a one or two percent difference in currency will be one or two percent in your gross profit margin, which could be ten or twenty percent easily of your net profit. So small percentage differences at the profit margin, at the landed cost and the COGS level can make a significant difference to the bottom line, and currency really is one of those. It makes you think about how you approach currency conversion and how you protect yourself from those changes. Equally, it can go in your favour as well, so at the time of purchasing it can move either way.

Elspeth From A2X (09:19)
Yeah, I've seen that happen as well. Okay. All right, good. That's a really good point too. Give us a list of everything you would generally see included in landed costs — just a really quick list, Phil, so people are aware.

Philip Oakley (09:25)
Okay, quick list of landed costs. These are the most obvious ones — there's always more and nuances, but clearly: the cost of the product, what you're actually buying the product for; any freight — and when you think about that it's the cost to get it to your door, so you may have that container, but of course for so many people that container doesn't always arrive at the front and there may be other haulage to get it right to your final warehouse, which could be a third-party warehouse; any duties or taxes that are directly attributable to purchasing those products — that is all going into landed cost. There can be port charges, terminal charges, any sort of transport fees. Luckily, for some people they're using a freight forwarder or a company that's going to cover all these costs and then give them the invoice. That can be helpful sometimes, although it can then be difficult to break that down to individual products that people have bought across that. But that's all going to be included. Clearly exchange rate costs, gains and losses can also be included in that landed cost as well.

Elspeth From A2X (10:33)
Yeah, that's great. That's really good information. So accurate COGS doesn't just stop with getting your landed costs right. Once every unit is fully costed, you will still need a rule book for which costs leave inventory first — and that's going to be your cost flow method. We've popped a link in the description to a video that walks you through how to choose the right cost flow method for your business if you're interested, and you'll also find a link there to get in touch with the Outserve team if you'd like to. Phil, thanks again for joining us. It's always great to have your expertise in the mix.

Philip Oakley (11:32)
No problem, thank you very much for having me.