{"id":197,"date":"2020-04-20T09:00:00","date_gmt":"2020-04-20T09:00:00","guid":{"rendered":"https:\/\/brightpearl20.wpengine.com\/understanding-landed-costs-the-profit-margin-formula\/"},"modified":"2026-01-05T14:17:49","modified_gmt":"2026-01-05T14:17:49","slug":"understanding-landed-costs-profit-margin-formula","status":"publish","type":"post","link":"https:\/\/www.brightpearl.com\/blog\/understanding-landed-costs-profit-margin-formula","title":{"rendered":"Understanding Landed Costs &#038; The Profit Margin Formula"},"content":{"rendered":"<p><strong>Key Takeaways<\/strong><\/p>\n<ul>\n<li data-start=\"147\" data-end=\"340\">\n<p data-start=\"150\" data-end=\"340\">Profit margins aren\u2019t just selling price minus cost \u2014 you must account for <em data-start=\"229\" data-end=\"241\">true costs<\/em> beyond purchase price to measure profitability accurately.<\/p>\n<\/li>\n<li data-start=\"341\" data-end=\"474\">\n<p data-start=\"344\" data-end=\"474\">Gross profit margin formula:<br data-start=\"376\" data-end=\"379\" \/><em data-start=\"382\" data-end=\"433\">Gross Profit Margin = (Revenue \u2212 Costs) \u00f7 Revenue<\/em>.<\/p>\n<\/li>\n<li data-start=\"475\" data-end=\"675\">\n<p data-start=\"478\" data-end=\"675\">Landed cost defined: It\u2019s the <em data-start=\"512\" data-end=\"559\">total cost to bring goods to your destination<\/em>, including product price, freight, insurance, duties, taxes and other fees.<\/p>\n<\/li>\n<li data-start=\"676\" data-end=\"871\">\n<p data-start=\"679\" data-end=\"871\">Ignoring landed costs can mislead profitability estimates \u2014 e.g., assuming higher margins without these additional costs can lead to over-budgeting.<\/p>\n<\/li>\n<li data-start=\"872\" data-end=\"1008\">\n<p data-start=\"875\" data-end=\"1008\">Landed cost formula components include: item cost + shipping + customs + risk + overhead.<\/p>\n<\/li>\n<li data-start=\"1009\" data-end=\"1187\">\n<p data-start=\"1012\" data-end=\"1187\">Using landed costs in margin calculations gives more accurate insights \u2014 helping businesses price, budget and forecast more reliably.<\/p>\n<\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Working out your profit margins should be simple. If you the cost of a product is $x, and you sell it for $x + $y, then $y is your profit &#8211; right? Unfortunately, it\u2019s not quite so easy. In order to accurately gauge the profitability of your products, you need to be able to answer two questions:<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">What is the profit margin formula?<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">What is <\/span><a href=\"https:\/\/www.brightpearl.com\/blog\/understanding-landed-costs-profit-margin-formula\"><span style=\"font-weight: 400;\">landed cost<\/span><\/a><span style=\"font-weight: 400;\">?<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">To answer these, we first need to look at gross margins.<\/span><\/p>\n<p><a href=\"https:\/\/www.brightpearl.com\/bookdemo\"><img decoding=\"async\" class=\"alignnone wp-image-4577 size-full\" src=\"https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7.png\" alt=\"\" width=\"793\" height=\"275\" srcset=\"https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7.png 793w, https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7-300x104.png 300w, https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7-768x266.png 768w\" sizes=\"(max-width: 793px) 100vw, 793px\" \/><\/a><\/p>\n<h2><span style=\"font-weight: 400;\">What Are Gross Margins?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">First, let\u2019s look at what gross profit is. Gross profit is the revenue you earn minus the total price of production or purchasing items. These costs go beyond the purchase price of the items, and include things like shipment costs and freight rates, but we\u2019ll get to that later. <\/span><b><\/b><\/p>\n<p><span style=\"font-weight: 400;\">The gross profit is a quick way of understanding <\/span><a href=\"https:\/\/www.brightpearl.com\/retail-reporting-analytics\"><span style=\"font-weight: 400;\">how your business is doing<\/span><\/a><span style=\"font-weight: 400;\"> at a basic level. It differs from net profit, as <a href=\"https:\/\/www.brightpearl.com\/blog\/how-to-calculate-and-improve-net-profit-margin\">net profit margin<\/a> takes into account operating costs (salaries, rent, marketing, and so on), whilst gross profit is solely about what you\u2019re selling.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">For now, it\u2019s enough to understand that:<\/span><\/p>\n<p style=\"text-align: center;\"><b>Gross Profit = Revenue &#8211; Costs<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Gross profit margins show the percentage of revenue above the costs of goods sold. The higher the margin, the better your bottom line, as your company is earning more money per dollar spent on goods. So how do you calculate profit margin formula? It\u2019s easier than it sounds. Simply take the gross profit and divide it by revenue. We can express this in two ways:<\/span><\/p>\n<p style=\"text-align: center;\"><b>Gross Profit Margins = Gross Profit \/ Revenue<\/b><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">or<\/span><\/p>\n<p style=\"text-align: center;\"><b>Gross Profit Margins = (Revenue &#8211; Costs) \/ Revenue<\/b><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s plug in some numbers to see how this works. For ease, we\u2019re going to take some simple figures rather than something more representative of actual costs.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Company A earned $1000, and spent $400 on goods. Their gross profit is therefore $1000 &#8211; $400, so $600.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Company B earned $800, and spent $200 on goods. Their gross profit is therefore $800 &#8211; $200, so $600.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">In terms of gross profit, they\u2019re both doing equally well. But this isn\u2019t the best way of looking at it. Now let\u2019s look at their <\/span><a href=\"https:\/\/www.brightpearl.com\/ecommerce-guides\/retail-kpi-gross-profit-margin\"><span style=\"font-weight: 400;\">gross profit margins<\/span><\/a><span style=\"font-weight: 400;\">.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Company A\u2019s gross profit is $600, and their revenue is $1000. If we divide 600 by 1000, we get 0.6. That means that for every dollar of revenue, 60% was profit.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Company B\u2019s gross profit is $600, and their revenue is $800. If we divide 600 by 800, we get 0.75. That means that for every dollar of revenue, 75% was profit.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">It\u2019s clear here that Company B are doing much better than Company A &#8211; they have a much higher ratio of profit to expense. Of course, it\u2019s possible that by considering other metrics we might see other differences. Perhaps B has higher operating costs than A, so their net profits (which take that into account) might be lower. But in terms of making money off product, B are excelling.\u00a0<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you wanted to repeat this with net profits rather than gross profits, you can adjust the formula like so:<\/span><\/p>\n<p style=\"text-align: center;\"><b>Net profit = Revenue &#8211; Total Expenses<\/b><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">Where total expenses = cost of goods, operating costs, etc<\/span><\/p>\n<p style=\"text-align: center;\"><b>Net profit margins = (Revenue &#8211; Total Expenses) \/ Revenue<\/b><\/p>\n<p><a href=\"https:\/\/www.brightpearl.com\/bookdemo\"><img decoding=\"async\" class=\"alignnone wp-image-4577 size-full\" src=\"https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7.png\" alt=\"\" width=\"793\" height=\"275\" srcset=\"https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7.png 793w, https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7-300x104.png 300w, https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7-768x266.png 768w\" sizes=\"(max-width: 793px) 100vw, 793px\" \/><\/a><\/p>\n<h2><span style=\"font-weight: 400;\">What Are Landed Costs?<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">Landed cost definition (from <\/span><a href=\"http:\/\/www.businessdictionary.com\/\"><span style=\"font-weight: 400;\">Business Dictionary<\/span><\/a><span style=\"font-weight: 400;\">): The total cost of a landed shipment including purchase price, freight, insurance, and other costs up to the port of destination. In some instances, it may also include the customs duties, value-added tax, brokerage fees, and other payments levied on the shipment. There&#8217;s also currency conversion to consider &#8211; different countries will have different exchange rates to USD.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">In order to accurately fill in profit margin formulae, you need to account for the total landed cost. Calculating landed costs can seem tricky at first, and it requires a certain amount of estimation, but it\u2019s something you\u2019ll grow familiar with over time. Brightpearl does have a feature that can <\/span><a href=\"https:\/\/help.brightpearl.com\/s\/article\/212633143\"><span style=\"font-weight: 400;\">allocate landed costs<\/span><\/a><span style=\"font-weight: 400;\"> for you.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Let\u2019s look through a simple example to show why landed costs matter. In this case, you\u2019re looking to buy an item &#8211; let\u2019s say you&#8217;re importing 5000 HDMI cables &#8211; and weighing up which supplier to choose.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Supplier A charges $1 per HDMI cable, with a 10% discount on bulk orders over 1000 items. This would cost you $4,500. If you sell each cable at $5, your profit margin is 0.82. ((25,000 &#8211; 4500) \/ 25,000).<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Supplier B charges $1.05 per HDMI cable, and has no bulk discounts available. This would cost you $5,250. If you sell each cable at $5, your profit margin is 0.79. ((25,000 &#8211; 5,500) \/ 25,000).<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Looking at the purchase price alone, it makes sense to choose Supplier A. However, let\u2019s take a look at the extra fees that might come up.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Supplier A charges a flat rate of $500 for international shipping. They\u2019re based in a country that has no preferential agreements with yours, and so has an import duty rate of 25%.<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Supplier B bases their shipping fee on weight, and it comes to $250. They\u2019re based in a country that has a preferential agreement with yours, and the import duty rate is only 10%.<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">Let\u2019s use these in our simplified landing cost formula. Instead of costs = purchase price, we can use the true cost &#8211; including all these additional fees.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Supplier A\u2019s costs: $4,500 + $500 + ($4,500 x 0.25) = $6125<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Supplier B\u2019s costs: $5,250 + $250 + ($5,250 x 0.1) = $6025<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">You can see from this landed cost calculation that that Supplier B\u2019s landed costs are less. If we re-do the gross profit margin formula with these new costs, you\u2019ll see the difference even more.<\/span><\/p>\n<ul>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Purchasing from Supplier A gives us (25,000 &#8211; 6125) \/ 25,000 = 0.755\u00a0<\/span><\/li>\n<li style=\"font-weight: 400;\"><span style=\"font-weight: 400;\">Purchasing from Supplier B gives us (25,000 &#8211; 6025) \/ 25,000 = 0.759<\/span><\/li>\n<\/ul>\n<p><span style=\"font-weight: 400;\">You might look at these and think that they\u2019re very similar, so why did we bother adding in this landed costs formula? If you take a step back and compare them to the original assessment, you can see the difference more clearly.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Without landed costs taken into account, purchasing from A gave us an assumed profit margin of 0.82, compared to the more accurate 0.755. Supplier B gave us 0.79, compared to 0.759. If you had used the figure without landed costs in your assessment for the year, your budget would be out.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">If you\u2019d bought from A and estimated your profit margin without taking landing costs into account, you might end up in the following situation. You expect to sell 500,000 HDMI cables over the course of a year. Your profit margin is 0.82, so you expect to see $410,000 profit. You budget with this in mind. Unfortunately, the accurate margin including landed costs leads to you only seeing $377,500 in profit. That\u2019s an overestimation of $32,500 to account for.<\/span><\/p>\n<h3 data-start=\"1040\" data-end=\"1112\"><strong data-start=\"1044\" data-end=\"1112\">Landed Cost Example: How to Calculate the True Cost of Inventory<\/strong><\/h3>\n<p data-start=\"1114\" data-end=\"1272\">Landed cost represents the <em data-start=\"1141\" data-end=\"1193\">total cost of bringing inventory to your <a href=\"https:\/\/www.brightpearl.com\/warehouse-management-system\">warehouse<\/a><\/em>, not just the supplier price. Here\u2019s a simple landed cost calculation example.<\/p>\n<p data-start=\"1274\" data-end=\"1320\">A business imports <strong data-start=\"1293\" data-end=\"1306\">100 units<\/strong> of a product:<\/p>\n<ul data-start=\"1322\" data-end=\"1468\">\n<li data-start=\"1322\" data-end=\"1367\">\n<p data-start=\"1324\" data-end=\"1367\">Purchase price: <strong data-start=\"1340\" data-end=\"1350\">$1,000<\/strong> ($10 per unit)<\/p>\n<\/li>\n<li data-start=\"1368\" data-end=\"1396\">\n<p data-start=\"1370\" data-end=\"1396\">Shipping costs: <strong data-start=\"1386\" data-end=\"1394\">$300<\/strong><\/p>\n<\/li>\n<li data-start=\"1397\" data-end=\"1434\">\n<p data-start=\"1399\" data-end=\"1434\">Import duties and taxes: <strong data-start=\"1424\" data-end=\"1432\">$150<\/strong><\/p>\n<\/li>\n<li data-start=\"1435\" data-end=\"1468\">\n<p data-start=\"1437\" data-end=\"1468\">Insurance and handling: <strong data-start=\"1461\" data-end=\"1468\">$50<\/strong><\/p>\n<\/li>\n<\/ul>\n<p data-start=\"1470\" data-end=\"1539\"><strong data-start=\"1470\" data-end=\"1492\">Total landed cost:<\/strong> <strong data-start=\"1493\" data-end=\"1503\">$1,500<\/strong><br data-start=\"1503\" data-end=\"1506\" \/><strong data-start=\"1506\" data-end=\"1531\">Landed cost per unit:<\/strong> <strong data-start=\"1532\" data-end=\"1539\">$15<\/strong><\/p>\n<p data-start=\"1541\" data-end=\"1776\">This example shows why landed costs are essential for accurate profit margin calculations. By including shipping, duties, and fees, businesses gain a clearer understanding of true product costs and can price inventory more effectively.<\/p>\n<p><a href=\"https:\/\/www.brightpearl.com\/bookdemo\"><img decoding=\"async\" class=\"alignnone wp-image-4577 size-full\" src=\"https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7.png\" alt=\"\" width=\"793\" height=\"275\" srcset=\"https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7.png 793w, https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7-300x104.png 300w, https:\/\/www.brightpearl.com\/wp-content\/uploads\/2020\/04\/bp-cta7-768x266.png 768w\" sizes=\"(max-width: 793px) 100vw, 793px\" \/><\/a><\/p>\n<h2><span style=\"font-weight: 400;\">How to Calculate Landed Cost Accurately<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">The above example is a very simplified one &#8211; it doesn\u2019t break down exactly how you get the total costs. In order to do that, you need to look at everything that could possibly play into it. The definition earlier states that it should include item price, shipping, insurance, customs duty, and other <\/span><a href=\"https:\/\/www.brightpearl.com\/blog\/ecommerce-in-2020\"><span style=\"font-weight: 400;\">taxes<\/span><\/a><span style=\"font-weight: 400;\">. We can capture this in the following landed costs formula:<\/span><\/p>\n<p style=\"text-align: center;\"><b>Item Price + Shipping + Customs + Risk + Overhead = Landed Cost<\/b><\/p>\n<h3><span style=\"font-weight: 400;\">1. Item Price.<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">This is simple &#8211; it\u2019s the cost of the products, and nothing else. Make sure to take into account bulk or wholesale discounts here.<\/span><\/p>\n<h3><span style=\"font-weight: 400;\">2. Shipping.<\/span><\/h3>\n<p>Importing and exporting will incur freight costs and handling fees. Any costs associated with shipping should be accounted for here. That can be the packaging, the handling, and the transportation itself. If you purchase from the global trade market rather than just sourcing from your own country, It\u2019s worth making sure you speak to your freight forwarder, so that you understand exactly what is included and what the total cost might be.<\/p>\n<h3><span style=\"font-weight: 400;\">3. Customs.<\/span><\/h3>\n<p>Here, customs is a stand-in for any import duty, harbor fee, and similar. If it\u2019s something dealt with during customs clearance, plug it into the formula here. These tariffs can change, so you need to keep up to date on what trade deals your country has, what ports are used, and other things that might impact the cost. Delaying payments at this stage can delay your entire shipment, and slow down your <a href=\"https:\/\/www.brightpearl.com\/supply-chain\">supply chain<\/a>.<\/p>\n<h3><span style=\"font-weight: 400;\">4. Risk.<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">No matter how good the supplier and freight company, accidents happen. Imported goods might not be up to standard, the crating company might have packaged things poorly, or you might need to pay extra transportation costs to get something on time. Covering risk with <a href=\"https:\/\/www.insurancenavy.com\/insurance-coverage\/auto\/\">insurance<\/a> or buying extra stock in case of faults are things that would go in this category. <\/span><\/p>\n<h3><span style=\"font-weight: 400;\">5. Overhead.<\/span><\/h3>\n<p><span style=\"font-weight: 400;\">Overhead is the \u2018anything else\u2019 part of the equation, but that doesn\u2019t mean it isn\u2019t important. Exchange rates, payment processing fees, and due diligence costs go in here.<\/span><\/p>\n<p><span style=\"font-weight: 400;\">Looking back to our HDMI cable example, let\u2019s add in a couple more stand-in figures. The shipment is insured for $200, and the additional overhead is $100. The formula for calculating landed cost with Supplier A would look like this:<\/span><\/p>\n<p style=\"text-align: center;\"><b>$4,500 + $500 + (4,500 x 0.25) + $200 + $100<\/b><\/p>\n<h2><span style=\"font-weight: 400;\">Using Landed Costs In The Profit Margin Formula<\/span><\/h2>\n<p><span style=\"font-weight: 400;\">This is where it starts to look complicated, but hopefully by working through it step by step you can see how it all fits together. Here\u2019s the gross profit margin formula with the landing costs formula in place of costs:<\/span><\/p>\n<p style=\"text-align: center;\"><b>Gross Profit Margin = Revenue &#8211; (Item Price + Shipping + Customs + Risk + Overhead) \/ Revenue<\/b><\/p>\n<p style=\"text-align: center;\"><span style=\"font-weight: 400;\">By using the landed price rather than unit costs to work out gross profit margins, you can create more accurate assessments of your business\u2019 financial future. It may still rely on estimation, but that estimation covers all the potential costs, not just the base price of a product. Using <a href=\"https:\/\/www.brightpearl.com\/inventory-management-system\">inventory management<\/a> software like Brightpearl to <\/span><a href=\"https:\/\/www.brightpearl.com\/accounting-for-inventory\"><span style=\"font-weight: 400;\">account for inventory<\/span><\/a><span style=\"font-weight: 400;\"> gives you the option to calculate landed costs automatically &#8211; avoiding having to manually use this formula every time.<\/span><\/p>\n<h2><span style=\"font-weight: 400;\">Landed Cost and Profit Margin Formula FAQs:<\/span><\/h2>\n<p><strong>What is the difference between FOB and landed cost?<\/strong><br \/>\n<em>&#8211; FOB defines who is responsible for shipping and risk during transit, while landed cost is the total cost of getting a product to its destination, including shipping, duties, and fees.<\/em><\/p>\n<p><strong>Is landed cost the same as COGS?<\/strong><br \/>\n<em>&#8211; No. Landed cost is part of COGS, but COGS may also include labor, overhead, or storage costs depending on the business.<br \/>\n<\/em><br \/>\n<strong>Who pays for landed costs?<\/strong><br \/>\n<em>&#8211; The buyer ultimately pays for landed costs, though payment timing depends on shipping terms like FOB or DDP.<\/em><\/p>\n<p><strong>What is a good gross profit margin?<\/strong><br \/>\n<em>&#8211; It varies by industry, but many retail and ecommerce businesses target 50\u201370% gross margin.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Key Takeaways Profit margins aren\u2019t just selling price minus cost \u2014 you must account for true costs beyond purchase price to measure profitability accurately. Gross profit margin formula:Gross Profit Margin = (Revenue \u2212 Costs) \u00f7 Revenue. Landed cost defined: It\u2019s the total cost to bring goods to your destination, including product price, freight, insurance, duties, [&hellip;]<\/p>\n","protected":false},"author":10,"featured_media":2753,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[116],"tags":[],"class_list":["post-197","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-financial-control"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v27.6.1 (Yoast SEO v27.6) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Landed Cost &amp; Profit Margin Formula Guide | Brightpearl<\/title>\n<meta name=\"description\" content=\"Learn how to calculate landed cost with a clear landed cost formula, examples, and profit margin guidance to help you price products accurately and protect your margins.\" \/>\n<meta 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