Learn · Lesson 02 of 12
Landed cost: what a unit really costs you
The supplier's price is the smallest part of what a unit costs. Build the full landed cost, in order, so that nothing is discovered after the money is spent.
What this lesson teaches
- Build a landed cost from a supplier quote without omitting a line
- Handle duty, VAT and payment fees correctly rather than approximately
- Recognise the four costs that are almost always left out
Landed cost is what one unit costs you by the moment it is in the customer's hands and the money has cleared. Not the quoted price. Not the price plus postage. Everything.
| Line | Amount | Where it comes from |
|---|---|---|
| Supplier unit price | £4.10 | The quote, at the quantity you will actually order |
| Inbound freight per unit | £0.85 | Shipment cost ÷ units in the shipment |
| Duty | £0.30 | Commodity code rate applied to price + freight |
| Inbound handling / inspection | £0.15 | Warehouse or your own time, priced honestly |
| Outbound shipping to customer | £3.20 | Carrier rate for the packed weight, not the item weight |
| Packaging | £0.40 | Box, filler, label |
| Payment processing | £0.63 | Percentage plus fixed fee, on the amount the customer pays |
| Expected returns and breakage | £0.55 | Return rate × cost of a returned unit |
| Landed cost | £10.18 | The sum. This is the number to use everywhere. |
The four lines that go missing
- Outbound shipping, when the store offers free delivery. Free delivery is not free; it is a discount you have chosen to hide inside the price. It belongs in landed cost.
- Payment fees. A typical card rate of roughly 1.5–2.9% plus a fixed 20–30p is small per order and large per year. It is charged on the total the customer pays, including the shipping they paid, so it is not a percentage of your product price.
- Returns. If 6% of units come back and a returned unit recovers nothing, every unit carries 6% of a unit's cost as an expected loss — that is the £0.55 line above, and it is a cost of selling, not an accident.
- Your own handling time. If you pack the orders, price your hour. A store that is only profitable because the founder works unpaid does not become profitable at volume; it becomes unaffordable at volume.
VAT, and why it is not a cost
If you are VAT-registered, VAT is collected from the customer and remitted; it passes through you and is not yours. The correct treatment is to strip it out of both sides: work in prices excluding VAT and in costs excluding recoverable VAT. If you are not registered, input VAT is not recoverable and genuinely is a cost, so it stays in landed cost. The error to avoid is mixing the two conventions — comparing a VAT-inclusive retail price against a VAT-exclusive supplier price inflates margin by the VAT rate, which is enough to make an unviable product look comfortable.
Order quantity changes the answer
A quote is only valid at its quantity. A £4.10 unit at 500 units and £3.40 at 2,000 units are different businesses: the second ties up more capital and takes longer to recover it. Build the landed cost at the quantity you can actually pay for and actually sell before it ages.
Figures in this lesson are illustrative inputs chosen so the arithmetic can be checked. They are not measurements. What FlowFinds Solutions actually measures is published, with its artifacts, in research.