FOB vs. Landed Cost: Why the Price on Your Supplier Invoice Isn't What You're Actually Paying
You get the factory quote back: $6.00 a unit, FOB. You run it against your target retail price, and the margin looks fine. Then the shipment clears customs, the freight forwarder's invoice lands in your inbox, and the number you actually paid per unit is closer to $7.50.
Nothing went wrong. The factory didn't lie to you. You priced your product off the wrong number. That's the FOB vs. landed cost gap: two different questions that look like the same question, and mixing them up is one of the quieter ways scaling brands lose margin before they even notice it's gone.
What is FOB pricing?
FOB, or Free on Board, is the price of your product at the moment it's loaded onto the vessel or aircraft at the port of origin. It's an Incoterm (opens in new tab) defined by the International Chamber of Commerce, and it marks a handoff point: everything up to that point, the product itself and getting it to the port, is the factory's price. Everything after it, ocean or air freight, insurance, duties, customs clearance, and inland trucking to your warehouse, is on you.
That handoff point is exactly why FOB is such a misleading number to price against. It was never meant to represent your total cost. It represents the factory's job, not yours.
What is landed cost?
Landed cost is the full price of getting that same unit from the factory floor to your warehouse door, ready to sell. It's the number that actually belongs in your cost of goods.
The formula is straightforward:
Landed Cost = Product Cost + Freight + Duty + Fees
- Product cost: your FOB price, straight off the supplier invoice
- Freight: ocean, air, or rail cost allocated per unit
- Duty: import tax, calculated as product cost multiplied by the duty rate for your product's HTS classification and country of origin
- Fees: customs brokerage, cargo insurance, and port or terminal handling
FOB vs. landed cost: what's the difference?
FOB tells you what the factory charged. Landed cost tells you what the product actually cost by the time you can sell it. The gap between them is everything that happens between the ship rail and your dock.
A worked example: how a $6.00 FOB unit becomes $7.57 landed
Say your supplier invoice quotes $6.00 per unit, FOB. Here's how that number grows by the time it reaches your dock:
- Product cost: $6.00
- Freight (allocated per unit): $0.55
- Duty at a 12% rate ($6.00 x 0.12): $0.72
- Fees (brokerage, insurance, handling): $0.30
Landed cost: $7.57, about 26% above the FOB price.
The exact gap moves with your product category, shipping mode, and duty rate. A high-duty category or an air freight lane will push it higher; a low-duty product moving by full container load will push it lower. That's why the FOB price alone can't tell you what you're actually paying, and why guessing at the gap is worse than calculating it.
Why the FOB vs. landed cost gap matters for your margins
If you're setting retail price or negotiating supplier terms off the FOB number, you're pricing against a cost that isn't your real cost. We've sat across the table from founders who built their entire margin model on the factory quote, only to find their true margin was five to eight points lower once everything actually landed. By then, the pricing is already out in the market and the margin is already gone.
This matters more now than it used to. Duty rates on the same HTS code can shift with trade policy, and a small change in country of origin can move your landed cost more than a change in factory price ever would. If you haven't looked at where else your margin might be leaking beyond landed cost, a broader supply chain audit (opens in new tab) is usually the next place to look.
How to calculate your landed cost
You need four inputs, the same four that make up the formula above:
- Product cost: the FOB price per unit from your supplier invoice
- Freight: your quoted shipping cost, divided by units per shipment
- Duty rate: found by looking up your product's HTS code and country of origin
- Other fees: brokerage, insurance, and handling, usually quoted per shipment and divided per unit
Add them up, and you have the number that should actually be driving your pricing and margin decisions, not the one on the supplier invoice.
Common questions about FOB vs. landed cost
Is FOB the same as landed cost? No. FOB is the price at the port of origin, before shipping. Landed cost adds freight, duty, and fees to show the full cost delivered to your dock.
Does landed cost include tariffs? Yes. Duties and tariffs, calculated against your product's HTS classification and country of origin, are usually the single largest piece of the gap between FOB and landed cost.
How much higher is landed cost than FOB price? It depends on the product, shipping mode, and duty rate, but a 20 to 30% premium over FOB is common for ocean freight importers. High-duty categories can run well above that.
Run your own numbers
You don't need to estimate this. Plug your product cost, freight, duty rate, and fees into Izba's landed cost calculator and see your real number before you set a price or sign a PO.
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