ROAS used to be a metric that merchants relied on because it’s simple: “If I spend $X on ads, then I know I made $X based on the dollar amount of sales.” For a time, this worked, but ROAS is not a metric your brand should be heavily relying on anymore. Part of the reason why you shouldn’t rely on ROAS is due to the fact that it only accounts for advertising costs.
But any merchant knows you have to account for taxes, insurance, shipping costs and more to track how profitable your store truly is. That’s why we recommend tracking another metric: Landed Cost.
What is landed cost?
The cost of getting a product from the store to the customer is called its "landed cost." This includes suppliers, storage, taxes, insurance, and more.
To figure out how profitable a business is, it’s important to keep track of landed costs and know how to calculate them correctly. It's the same way that customer acquisition costs (CAC) don't tell you everything on their own. You also need to look at customer lifetime value (CLV) to figure out if your CAC is reasonable.
Landed cost is based on the same idea: brands must list their costs to show accurate profit margins.
How to calculate landed cost
Add your manufacturing cost, shipping cost, shipping insurance, import duties, and any other fees to get your landed cost.
- Manufacturing cost + shipping cost + shipping insurance + import duties + other fees = landed cost.
Even though the formula for landed cost is simple, it’s challenging to gather the data it needs. You will need to use spreadsheets or an analytics platform to figure out each cost accurately.
Let's use fulfillment for shoes as an example of determining landed cost. Let's say the following is true:
- You have 100 shoes to ship.
- It costs $4 per unit to make a pair of shoes, which includes getting the raw materials from the supplier and making the shirt.
- The flat rate for shipping the shoes is $150.
- You kept the shoes in a warehouse for three weeks, which cost you $50 in storage fees.
- Shipping insurance is included, so there is no cost in this case.
- The rate of import duty is 10%.
Now, let's put the numbers into the formula:
- The shoes cost $400 to make, plus $150 to ship, plus 400*0.1 in import duty, plus $50 to store.
- The Landed Cost of a pair of shoes is $6.40 per unit ($640/100 units)
You might ask: Is a landed cost of $6.40 good or bad?
The answer depends on how much you're selling the 100 shoes for and how much you're spending on other things, like advertising.
If you sell each pair of shoes for $20, which is a 212% markup, then your business may be able to handle the $6.40 cost.
Assuming none of the shirts are on sale, the 100 shoes will sell for a total of $2,000, so from a "landed cost" point of view, you would be well in the black. If all of the $100 items were sold at full price, the gross margins would be $1,360. But to figure out how profitable you are, you have to take into account your contribution margin, customer service, and other costs.
Putting together the parts of landed cost
Suppliers & production costs
These costs include the money you pay suppliers for raw materials or finished goods, as well as the money you spend on production and manufacturing to make finished goods.
For landed cost, shipping costs are based on how much it costs to get the product from where it was made to where it will be shipped from.
Shipping costs depend on where the package is going, how much it weighs, and how big it is. You might also have to pay extra for services like special handling and fast delivery.
Customs & import duties
Customs and import duties add a lot to your costs, which is why landed costs are more often used in international shipping. You can pay the duty costs or pass them on to the customer by selling more expensive products. But if retail prices go up, sales may go down.
Shipping insurance is a service that you can choose to use or not to use. Many big shipping companies offer some level of shipping insurance for free, but you'll have to pay extra for more expensive packages.
Fees for handling and taking payments
Handling fees are paid to fulfillment teams that pick and pack your items for shipping, and payment processing fees are added to each transaction at your store.
Storage and warehousing costs
Warehouse costs include storage, management, handling, and running the warehouse. If you use more than one warehouse or special facilities (like ones that control the temperature), these costs add up even more.
How to lower your landed cost so you can grow
As your business grows, even small differences in landed costs matter a lot.
1.1% is the difference in profit margins may not seem like much when you're just starting out, but as your business grows, that small percentage could mean a difference in profit of five, six, or seven figures.
This may seem obvious, but even a small mistake can have big effects. For example, let's say you forget to include the $10/unit insurance fees in your landed cost calculation for a product and the total cost you get is $55.
If you sell the product for $65 and expect a $10 profit, you won't make any money because you miscalculated. That's why it's important to use the right formula and include all fees.
Growing quickly is scary. There's a lot more that you need to do. When demand goes up, there are more orders to fill in less time, but if the orders aren't filled on time, customers could be upset. Demands for support also go up, and your competition gets tougher.
But growth can be overwhelming, so you have to be smart about how you spend your money. If you hire too many new people or dramatically grow your fulfillment network, it might not be possible to keep going.
When getting ready to grow, keep a close eye on your landed costs and move quickly if they go up.
For example, your landed cost could go up if your handling and storage costs go up a lot. In this case, you might want to think about ways to save money, like finding a logistics partner with more stable prices.
Optimize your supply chain
Your landed costs are directly affected by how well your supply chain works. If a chain isn't set up in the best way, it could lose money at different points. For example, if you don't manage your warehouse and inventory well, you might spend more on storage and handling costs.
In the same way, if your packing process isn't optimized, you might have to pay more for shipping because your packages are the wrong size.
Review your relationships with suppliers and 3PLs to keep costs under control
If your consumer goods brand grows quickly, you might have thought about working with a third-party logistics (3PL) provider to meet Amazon's fulfillment standards.
Working with a 3PL can help you stay competitive, but it also makes you more dependent on people outside your company. That's why it's even more important to build strong relationships.
When demand is high, like during the holidays, third-party logistics providers can help you scale up your fulfillment operations and keep them running smoothly. They can also help you save money on shipping by spreading out your inventory and negotiating discounts with carriers.
The better your relationship with a 3PL partner, the more you can count on them (have you tried sending your warehouse pizza and brownies?).
In the same way, having good relationships with suppliers is important to keep the supply chain running smoothly and keep costs down. The COVID-19 pandemic showed how important it is to have good relationships with suppliers. Brands with the best 3PL partnerships got their orders faster and paid less when there were problems in the supply chain.
Calculating landed cost isn't the most exciting part of running a business, but it's very important, especially if you want to grow sustainably. It's also important to have good financial and analytics systems in place so that you can figure out each cost accurately before adding them all up.