Landed cost

Landed cost is the true, all-in cost of getting one unit of product from your supplier to your warehouse shelf. It's the invoice price plus everything it takes to land the goods: freight, duty, and handling.

It is the number your margins, stock valuations, and supplier comparisons should be built on — not the unit price on the supplier's quote.

The gap between the two is the whole point. A supplier in Vietnam and a supplier in Portugal can both quote £8.00 a unit. By the time the goods reach your warehouse in the UK, one might cost you £9.10 landed and the other £11.40. Same invoice price, very different reality.

The formula

Landed cost per unit = Unit price + Freight per unit + Duty per unit + Handling per unit

Each shipment-level cost gets divided across the units in the shipment to get a per-unit figure:

• Unit price — what the supplier charges per unit (ex-works or FOB, depending on Incoterms)
• Freight per unit — ocean/air freight, insurance, and inland haulage, allocated across the units shipped
• Duty per unit — import duties and tariffs, driven by the product's classification and country of origin
• Handling per unit — customs clearance, broker fees, port charges, demurrage, and inbound receiving

Worked example

You order 2,000 units at £8.00 each from an Asian supplier on FOB terms.

• Goods: 2,000 × £8.00 = £16,000
• Freight + insurance: £3,200 for the shipment → £1.60 per unit
• Duty: 12% on the £16,000 goods value = £1,920 → £0.96 per unit
• Handling (clearance, broker, port, inbound): £900 → £0.45 per unit

Landed cost per unit = £8.00 + £1.60 + £0.96 + £0.45 = £11.01

The invoice said £8.00. The stock actually cost you £11.01 — 38% more. If you'd priced your retail margin off £8.00, you'd be overstating gross margin on every unit you sell.

Why invoice price misleads

The invoice price is the most visible cost and the easiest to compare, which is exactly why it traps people. Consider two suppliers, both quoting £8.00 a unit:

• Supplier A (Portugal, DDP): ships in 9 days, low freight per unit, no duty into the UK under a trade agreement, minimal handling. Landed cost ≈ £8.70.
• Supplier B (Far East, FOB): lower headline reliability, long ocean freight, 12% duty, more handling and broker fees. Landed cost ≈ £11.01.

On invoice price they look identical. On landed cost, Supplier A is 27% cheaper. The decision flips entirely once you cost it properly — and the same logic applies to your intake margin, which is only as honest as the cost you feed it.

How Incoterms change what's included

The Incoterms on the PO decide which of these costs sit in the supplier's price and which land on you separately:

• EXW (Ex Works): the unit price covers the goods at the factory door. Freight, duty, and handling are all yours to add.
• FOB (Free on Board): the supplier gets goods onto the vessel; you add ocean freight, duty, and handling.
• DDP (Delivered Duty Paid): the supplier's price already bundles freight and duty to your door — the "all-in" quote.

This is why comparing a DDP quote against an FOB quote on headline price alone is meaningless. You have to normalise both to a full landed cost at the same destination before they're comparable.

How landed cost feeds valuation

Landed cost is the right basis for stock valuation. The weighted average cost of a SKU should reflect what each batch actually cost to land, not the invoice price. Get this wrong and two things break: your balance-sheet inventory value is understated, and your reported gross margin is overstated — you look more profitable than you are until the freight and duty bills land.

Common pitfalls

• Pricing margin off invoice price. The most common and most expensive error. Your true gross margin uses landed cost, not what the supplier charged for the goods alone.
• Allocating freight by unit count when units differ wildly in size. A bulky SKU and a small SKU in the same container shouldn't carry the same freight per unit — allocate by volume or weight where it matters.
• Forgetting duty changes the picture mid-year. A tariff change or a shift in country of origin moves landed cost without the invoice price moving at all.
• Treating handling as negligible. Broker fees, port charges, and demurrage add up — and demurrage in particular can blow a per-unit cost apart on a delayed container.