How to calculate the landed cost and price your imported products
Once you’ve finished sourcing suppliers for products you’d like to sell on your ecommerce storefront, the next big step is pricing them. Pricing is a very important aspect in the eCommerce process and requires a pricing strategy. By that I mean are you going to price your products at the lowest possible price, in order to grab as many orders and as much market share as possible or will go for a more premium pricing strategy that foregoes volume, for margin. Premium pricing strategies can be used when you’re looking to attract a more affluent customer base, but is also dependent on the products you’re selling – no one is going to pay top dollar for a product that is readily available (and cheaper) elsewhere; however that same person might be happy paying a bit more if they know your product is unique, the service received will be world class and different from anywhere else, if the process is easier, or even if they connect with your brand. A low-ball pricing strategy is one where you charge the absolute minimum price possible in the hopes of attracting more customers. The only problem here is generally you’ll be attracting customers who’s primary criteria for buying is price. That said, those same customers might not always display a loyalty toward your business when a cheaper price is found somewhere else. Usually companies that are able to pitch their products at the lowest possible price either have massive amounts of web traffic (which will ultimately translate into sales), and large/highly efficient systems in place to deal with such volumes in orders; or they are companies which have next to no overheads and, relatively speaking, keep their running costs to just about zero. Which is nearly impossible for growing online businesses that hold stock, hire staff and advertise.
Importing, for all it’s extra work, can have the benefit of giving your business unique products not found anywhere else in your country or marketplace. This then means you’re able to be a bit more flexible in respect to your pricing and don’t always have to be ultra-competitive. Dynamic pricing will allow you to pitch the price of a product slightly higher than normal when you know an item will be popular or when it 1st launches for example. Test your pricing as well to see where that sweet spot is. As an example we sell a Google Cardboard 3D Headset product that I had a feeling would be popular but didn’t realise just how popular. I kept seeing this product go out of stock despite having good stock levels, so I tested the pricing to see what the perfect balance of sales vs margin would be. The price has settled on some 30% above what it was 1st pitched at, and it still continues to sell well. The idea is to price at the upper end of the scale when the going is good and then normalise the pricing when your competition catches on and starts stocking the product too, or the “early adopters” are tapering off and the product just isn’t as new as it once was and not doing as well.
Calculating the price of imported (or locally sourced) products
The main trick is to ensure you have all of your costs accounted for. You’d be amazed at all the associated costs that creep up when getting a product from a suppliers’ warehouse to your virtual shelves and ready to ship. Freight charges, payment fees, custom duties, document fees, handling fees… the list goes on, and all need to be factored in.
Below you’ll see a snippet from a courier invoice which highlights the total amounts payable once your order is ready to clear through customs. On this invoice you’ll notice totals for VAT and custom duties. Some products are eligible for custom duties but everything you import will have VAT added to it. The VAT is calculated at 14% of the goods value based on the current Rate of Exchange (ROE). So for example, an order of £500 with an ROE of R18.3/£1 would have a customs value of ±R9150. This amount is also the base used to determine the custom duties payable. Custom duties differ from country to country and also depend on the country you’re importing from. Importing from EU countries will have a different duties rate to SADEC member states. The following website: FTW Online is a great resource for checking the tariff amounts of products coming into South Africa.
From below we can see that the supplier order has duties for the amount of R4260.20 and VAT for R3876.74 as well as a disbursement fee from the courier of R45.57. Now if you know that all products in the shipment will attract duties then your pricing of these products will take the duties paid, divided by the customs order value. In this case that would be R4,260.20 / R24,567.00 which is 0.173 or 17.3%. So you know that the items in the order will attract a 17.3% custom duties charge every time you import these products.
However it’s important to go to the customs worksheet at the back of this document to see the breakdown of which products have attracted the duties as some may be free from duties and don’t need the 17% factored into the cost price. Below you’ll see a snippet from this worksheet. From here you can see, line by line, what the tariff code declared is and the total duties and VAT that makes up the final total.
Note: don’t always rely on the customs person to declare your products correctly and use the correct tariff. Double check to ensure they are using the correct tariff heading and ask them to change it if they are not. This could mean that you’re paying import duties when you’re not supposed to.
So once you have all of the associated costs involved with getting your product from the supplier and onto your warehouse floor you have a good idea of what the true Landed Cost will be. The landed cost is made up of the goods value (supplier price X ROE) plus all the shipping, duties and ancillary costs. You must also factor in the handling and associated costs you or your warehouse might encounter. An example would be large products that need extra work to be sorted or packed away, small fiddly products that need to be organised and labelled for example – all of these while maybe not direct costs due translate into billable man hours.
The pricing formula would be as follows:
Cost of goods (multiplied by ROE) + freight and shipping costs + duties and fees + markup + VAT = Selling price
It’s ethical practice to separate these costs when calculating the markup, and only markup the cost of goods portion, with everything else being charged at cost value. If you’re calculating pricing in a volatile period and you’re almost certain that your currency will slide in the next few months, then factor in a pricing buffer on the cost of goods.
Below is an invaluable tool I’ve created and use to price imported products. It allows you to add all the import costs to get to a selling price. It will also tell you the profit margin at a particular selling price. It’s very easy to use and all you need to do is input the Unit price, Forex rate, shipping % (which is your raw freight costs / total goods value), duties fees %, and your markup %. There’s also a commission field in there if you’d like to give a commission to affiliates or advertising costs, or sales people and need to factor in that too. You’ll notice in the central part there are 2 calculators for working out your markup and below that your desired margin. I hope you find it useful.