How to Work Out the True Landed Cost Before You Commit to a Product

The factory price is not the cost of the product. It is the starting point for a calculation that most founders either rush or skip entirely, and that is where the damage gets done.

I've seen it happen with my own money. You get a sample you like, the factory quotes you an ex-works price that makes the margin look reasonable, and suddenly you're placing a purchase order based on arithmetic that is, at best, half-finished. The product arrives, the real costs stack up, and you find yourself selling at a margin that doesn't actually cover the business. Or worse, you don't find out until six months in when you're wondering why the bank account looks the way it does.

So here is a proper walkthrough of every line between the ex-works price and the moment a unit is available to sell.

Step 1: Start with the ex-works price and convert it honestly

Most factories in China quote in US dollars. Some quote in yuan. Either way, you are carrying currency risk the moment you agree a price, and most founders ignore it completely.

Don't use the spot rate on the day you run the numbers. Use a rate that is a few percentage points worse. If the rate moves against you before you settle the invoice, you want that already baked into your model. I'd argue that founders who source in dollars should be thinking about forward contracts once the order sizes justify the hassle, but even without one, building in a buffer is just basic discipline.

Your landed cost calculation must use a conservative exchange rate. Not the best rate from the last six months. A realistic, slightly pessimistic one.

Step 2: Add freight, insurance and port charges

This is where people most commonly underestimate, partly because freight costs move around a lot and partly because there are more line items than you expect.

You've got the freight itself, which varies by whether you're shipping full container load, less than container load, or air (and air is eye-watering for anything bulky). Then there's origin charges at the Chinese port, destination charges at Felixstowe or wherever it's coming in, and port handling. On top of that, marine cargo insurance. Most forwarders will quote you an all-in number, but check what that actually includes before you build it into your model, because "all-in" sometimes isn't.

As a rough sanity check: freight as a percentage of the ex-works price tends to feel painful on low-value or bulky products and manageable on high-value, compact ones. If freight alone is pushing you past 15% of the ex-works price, that product has a unit economics problem worth examining before you commit.

Step 3: Import duty and VAT

Look up the commodity code for your product and find the actual UK import duty rate. Don't guess. Rates vary enormously across categories, and getting this wrong by even a few percentage points across a large shipment is a meaningful number.

VAT at import is 20% on the customs value, which is the ex-works price plus freight and insurance. You'll reclaim this if you're VAT registered, so it doesn't sit permanently in your cost, but it does sit in your cash cycle. If you're paying the factory net 30 and then waiting two months for stock to land and clear customs before you can sell it, that VAT outlay is tied up for a while. Cash cycle is a cost even when the money comes back.

Step 4: Pre-shipment inspection

If you're not paying for third-party inspections, you're carrying quality risk that will eventually cost you more than the inspection would have. A pre-shipment inspection on a typical consumer goods order from China runs somewhere in the low hundreds of pounds. Cheap relative to the cost of receiving a container of defective stock, handling customer returns, and dealing with the Amazon account health consequences.

The company I use and recommend is V-Trust. They're a third-party inspection firm that specialises in China-based manufacturing audits and pre-shipment checks, with English-speaking project managers and standardised reporting that's actually useful rather than a box-ticking exercise. They cover most consumer goods categories and can turn around an inspection quickly when you need it. There are other options, but V-Trust is the one I've used consistently and trust.

Build the inspection fee in. Every time.

Step 5: Amazon inbound and FBA fees

This is where founders who run the calculation in a spreadsheet rather than inside their Amazon account tend to go wrong. FBA fees are specific to the product's size tier and weight, and Amazon's fee structure is not simple.

Measure the packaged unit accurately, not the product itself. A pillow that compresses nicely in the hand might classify into a size tier you weren't expecting once it's in a polybag. Use Amazon's revenue calculator with the actual dimensions and weight you're going to ship in, and use the fees that will apply in the period you're selling, because the festive peak surcharge between mid-October and mid-January changes the number.

From the UK side, the current FBA base rates also carry a 1.5% fuel and logistics surcharge on top of the headline fee, and if you're selling in a category that attracts a 15% referral fee, the Digital Services Tax adds another 0.3% on top of that. Small numbers individually, but they compound.

Add the inbound shipping cost from your UK delivery point to the Amazon fulfilment centre. That's a separate line.

Step 6: The cost of returns

Most people leave this out. Don't.

If you're selling a category with a meaningful return rate, a proportion of those units will come back in unsellable condition. Some will be reprocessed at cost. Some will be disposed of. The FBA return processing fee applies. Build an estimate into your landed cost model based on the category average, and if you don't know your category's return rate yet, use a conservative figure and revisit it once you have real data.

Step 7: The cash cycle as a hidden cost

This one doesn't show up as a line item but it affects whether the whole thing is viable.

If your factory requires 30% deposit and 70% before shipment, your cash is committed from the moment you place the order. Add the freight transit time. Add customs clearance. Add the time it takes Amazon to receive and process inbound stock. By the time a unit is available to sell, you might be eight, ten, twelve weeks from your initial outlay.

That matters if your working capital is tight, if you have a seasonal product where timing is everything, or if you're reinvesting revenue from one order to fund the next. Longer payment terms from your factory are genuinely worth negotiating for, and in my experience, factories are more flexible on terms than most UK founders think. Everything in that conversation is negotiable.

Step 8: Sense-check the whole thing

Once you have every line, divide the total by the number of units and you have your true landed cost per unit. Now look at your target selling price and work backwards.

Subtract the Amazon referral fee and FBA fee (using the right size tier). Subtract your advertising cost per unit, even if it's an estimate. Subtract your landed cost. What's left is your contribution margin.

If that number doesn't work at a selling price you can actually charge in a competitive market, the product doesn't work. Not yet, anyway. Sometimes the answer is that you need a higher AOV, a product bundle, or a different sourcing approach. Sometimes the answer is that you walk away.

The factory price told you nothing. This calculation tells you everything.

Run it before you commit to the purchase order, not after the stock is on a ship.