What it means
Companies import for three broad reasons: the item is cheaper abroad, it is better abroad, or it is not available at home at all. A clothing brand may import for cost, a laboratory may import a specialist instrument for capability, and a food distributor may import simply because the crop does not grow locally.
The practical work sits around the goods rather than in them. There is a shipping arrangement, an insurance policy, a customs declaration, a duty payment, possibly a sales tax at the border, and a set of documents that must match each other exactly or the goods sit in a warehouse accruing charges.
The number that matters is landed cost, which is everything it takes to get one unit into your warehouse ready to sell. Buyers who compare a foreign unit price against a domestic one without adding freight, duty and clearance regularly discover the imported option was never cheaper.
Currency adds a second layer. If you agree a price in a foreign currency and pay ninety days later, the cost in your own currency depends on the exchange rate on payment day, which is why importers often use forward contracts to fix the rate in advance.
Cash flow is the nuance that catches new importers out. Sea freight can take six weeks, duty is payable at the border rather than when you sell, and the working capital tied up between paying the supplier and getting paid by your customer is far longer than with a local purchase.
In practice
Real-world examples.
Example
A brewery imports specialist hops from two countries because the varieties it needs are not grown domestically. It fixes the exchange rate with a forward contract twelve months ahead so recipe costings stay stable.
Example
An electronics distributor switches from a domestic wholesaler to importing directly. Unit cost falls by 22%, but minimum order quantities and six-week transit times increase inventory by $340,000, which the finance director insists is added to the business case.
Example
A restaurant group imports olive oil and cured meats monthly. When duty rates on one category change, it recalculates menu costings rather than absorbing the increase and quietly losing margin on a signature dish.
Formula
Calculation
Landed cost = Product cost + Freight + Insurance + Import duty + Clearance and handling fees
A homeware retailer orders 5,000 ceramic lamps at $12.00 each, so the product cost is 5,000 x $12.00 = $60,000. Sea freight for the container is $4,200 and marine insurance is $600.
Customs values the shipment on a cost, insurance and freight basis, so the customs value is $60,000 + $4,200 + $600 = $64,800. The duty rate for this product category is 6%, so duty is 0.06 x $64,800 = $3,888.
Customs broker fees, port handling and inland delivery come to $712. Total landed cost is $64,800 + $3,888 + $712 = $69,400.
Landed cost per unit is $69,400 / 5,000 = $13.88, against the $12.00 invoice price. If the lamps sell for $27.00, the gross margin per unit is $27.00 - $13.88 = $13.12, which is 48.6% of the selling price rather than the 55.6% the invoice price alone would suggest.Case study
Seen in the real world.
The following is a fictional, illustrative case. Halberry Home Goods sourced its bestselling storage baskets domestically at $19.00 a unit and found an overseas supplier quoting $11.20. The buying team calculated a saving of $7.80 a unit and placed an order for 12,000 baskets.
Once freight, insurance, 8% duty, clearance and inland haulage were added, the landed cost came to $14.35, so the real saving was $4.65 a unit rather than $7.80. Worse, the order tied up cash for nineteen weeks between paying a deposit and selling the first pallet, against two weeks on the domestic account.
Halberry kept importing, because $4.65 on 12,000 units is still $55,800 a year, but it changed how it decided. Every sourcing comparison after that used landed cost and a working capital estimate, and the domestic supplier was kept on a smaller contract to cover stock-outs during transit.
Watch out
Common mistakes.
- Comparing a foreign supplier's unit price directly with a domestic one, instead of comparing landed cost with landed cost.
- Forgetting that duty and border taxes are payable when the goods arrive, long before the goods are sold and paid for by customers.
- Leaving the exchange rate unmanaged on a large order, so a currency move quietly erases the margin the buying team worked to create.
Questions
People also ask.
What is landed cost?
It is the total cost of getting one unit into your warehouse, including product price, freight, insurance, duty, clearance and inland delivery.
Who is responsible for duty and shipping?
It depends on the agreed trade terms in the contract, which set out exactly where the seller's responsibility ends and the buyer's begins.
Does importing always save money?
No; it can lower unit cost while raising inventory, lead times and risk, so the honest comparison includes working capital and the cost of stock-outs.
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