Landed cost is the total cost of getting a product from a supplier to a buyer's door, ready for sale or use. It includes the purchase price plus every additional cost incurred along the way: freight, insurance, customs duties, taxes, and handling fees. It is what a product actually costs, not just what the invoice from the supplier says.
FORMULA
Landed Cost = Product Price + Freight + Insurance + Customs Duties + Taxes + Handling Fees
EXAMPLE
A distributor imports 1,000 units at $12.00 each ($12,000), pays $1,400 in ocean freight, $180 in insurance, $960 in customs duties, and $260 in handling.
Landed Cost = $12,000 + $1,400 + $180 + $960 + $260 = $14,800, or $14.80 per unit.
The supplier invoice said $12.00 per unit. The real cost to have that unit ready for sale was 23% higher.
Pricing and margin decisions based only on the supplier invoice price systematically overstate profitability on imported or freight-heavy goods. A product that looks like it carries a 40% margin against a $12.00 cost might carry closer to 27% once the true $14.80 landed cost is used, which changes whether that product, or that supplier relationship, is actually worth what it appears to be worth.
This distortion compounds across a catalog. A business comparing margin across domestic and imported products, without adjusting either to landed cost, is not making a like-for-like comparison at all.
Not every cost belongs in landed cost. Ongoing storage after goods arrive, and costs unrelated to acquiring the specific shipment, are typically treated as period expenses rather than allocated into inventory value.
When a single shipment contains multiple products, shared costs like freight and duty need to be allocated across the items, usually by weight, volume, or value, since the invoice for freight does not naturally split itself by SKU.
EXAMPLE
A container carries two products: 600 units of Product A (value $6,000) and 400 units of Product B (value $8,000), total value $14,000.
Shared freight and duty of $2,000 is allocated by value: Product A gets 6,000/14,000 × $2,000 = $857,
Product B gets 8,000/14,000 × $2,000 = $1,143.
Each product's landed cost is then its own price plus its allocated share.
The components of landed cost rarely arrive together. The supplier invoice, the freight forwarder's bill, the customs broker's invoice, and any port fees typically show up separately, days or weeks apart, from different parties. Building an accurate landed cost means matching all of them back to the same shipment before the true cost is known.
In practice, many businesses either skip this reconciliation and price off the supplier invoice alone, understating true cost, or apply a rough percentage markup as a landed cost estimate that is never actually verified against what was billed. Both approaches drift from reality as freight rates and duty structures change, which they do more often than most standard cost assumptions get updated.
