Calculate Total Cost
Before you move forward with an order, calculating your total product cost is the most crucial step to ensure that your business remains profitable and that your pricing strategy aligns with your financial goals. It’s easy to get excited about the prospects of selling a product, but without a comprehensive understanding of all associated costs, your business could end up losing money or struggling to break even. Here’s how to accurately calculate your total product cost and assess your expected margins.
1. Understand Your Landed Cost
The first component to calculate is your landed cost, which is the total cost of getting the product from the supplier to your warehouse or fulfillment center. This includes:
Product Cost: The cost you pay to the supplier for the product itself.
Import Duties: Taxes imposed by the country of importation based on the product's classification.
Shipping Costs: Freight costs for moving your goods from the supplier to your location, whether that’s through sea, air, or land transport.
Insurance: Cost of insuring the products during transit, in case of damage or loss.
Handling Fees: Charges for unloading, handling, and transporting goods from port to warehouse.
Once you’ve accounted for all of these, you’ll have the landed cost – the price to bring the goods to your location. This is the baseline cost of your product.
2. Add Storage and Fulfillment Costs
After you’ve calculated the landed cost, you need to include additional storage and fulfillment costs, which are incurred when your product is stored in a warehouse or fulfillment center and prepared for shipping to customers. These include:
Warehouse Storage Fees: Charges based on the space your goods occupy in the warehouse, typically calculated per pallet or cubic meter.
Labor Fees: Costs for the work involved in picking, packing, labeling, and shipping your product.
Fulfillment Fees: Costs related to getting the product to the customer, including packaging, shipping, and order processing.
Additional Services: Any extra services your fulfillment partner provides, such as custom packaging or kitting, should also be included.
These fees can vary depending on the complexity of your product, its size, and its weight, so it's important to factor them into your total cost calculation.
3. Calculate Total Product Cost
Now that you’ve accounted for both the landed cost and storage/fulfillment costs, you can calculate your total product cost by simply adding them together:
{Total Product Cost} = {Landed Cost} + {Storage & Fulfillment Costs}
This is the total amount it will cost you to bring the product to your customer, including all logistics, storage, and handling costs.
4. Compare with Your Target Total Cost
Once you have your total product cost, the next step is to compare it against your target total cost – the amount you want to spend per product to meet your profit margin goals.
Review Your Pricing Strategy: Your total product cost should align with your intended retail price. Be sure to factor in the margin you expect to make from each sale.
Adjust for Profit Margins: If your total product cost is too high for the price you want to sell it at, you may need to reconsider aspects of your supply chain, including renegotiating with suppliers, reducing fulfillment costs, or adjusting the product pricing.
Ensure Profitability: Make sure that after considering all costs, your expected margin allows for enough profit to cover operating expenses and leave room for growth.
5. Consider Margin Implications
The goal of calculating your total product cost is to ensure you can achieve your desired profit margin. For instance, if you want a 50% profit margin, you need to ensure that your selling price covers your total product cost while leaving room for profit.
For example:
Selling Price: $100
Desired Profit Margin: 50%
Total Product Cost: $50
In this case, you would need to ensure that your total product cost doesn’t exceed $50. If it does, you will need to adjust either your pricing or reduce costs in your supply chain to maintain a profitable margin.
6. Conduct a Final Review
Before proceeding with placing any orders, conduct a final review of your total product cost to ensure everything aligns with your financial goals. Double-check each component, especially any variable costs like shipping or fulfillment, which can fluctuate. Also, don’t forget to account for any unexpected costs, such as customs delays or packaging changes.
7. Conclusion
Calculating your total product cost is essential to running a successful business. By considering landed costs, storage and fulfillment fees, and other associated costs, you can ensure that your pricing strategy aligns with your target margins and remains profitable. Proper cost estimation will also allow you to make informed decisions about suppliers, logistics, and pricing adjustments to maintain healthy profit margins. Remember, getting this right before moving forward with an order is key to sustaining long-term success.
Need guidance on calculating your total product cost or finding the right pricing strategy? Don’t hesitate to send us a question on the “Messages” tab at portal.supplychainshark.com.
