Landed cost vs product cost vs profit margin

Use the right number

Product cost is the starting purchase cost. Landed cost adds the costs of getting stock to the chosen point. Profit considers the sale and the costs of making it. Margin and markup use different denominators.

Build from product cost to landed cost

Label the boundary of every number. “Cost per unit” is ambiguous unless you state whether it includes freight, duties, VAT that cannot be recovered and fulfilment. Consistent labels make comparisons useful.

Inputs to gather

• A supplier price and shipment quantity.
• A complete list of shipment costs without duplicated charges.
• A clear VAT recovery assumption.
• Selling revenue on the correct VAT basis.
• Fees, postage, packaging, advertising and expected return costs.

Turn cost into a selling decision

Allocate shipment costs to units first. Add per-sale costs separately. In the ShipTally model, profit is expected retained revenue minus total estimated cost. Margin divides profit by retained revenue; markup divides profit by cost. Use the same basis when comparing products.

Worked margin

Where profit gets overstated

• Using markup and margin interchangeably.
• Counting recoverable import VAT as a permanent product cost.
• Forgetting the postage charged to the customer is also revenue that may be refunded.
• Comparing a per-order fixed fee with a per-item cost where orders contain several units.

Before you price

Check whether your scenario matches the tool’s one-unit-per-order assumption. The result is a contribution estimate for the entered costs, not a complete business profit-and-loss account. Rent, salaries, financing, stock losses and other overheads may require further allowance.