Understanding Ex-Factory Costs and Landed Costs in the Retail Supply Chain

When determining the price of goods in the retail supply chain, especially in wholesale, two important cost concepts come into play: ex-factory cost and landed cost. These pricing terms are critical for both manufacturers and retailers to understand, as they affect the overall profitability and logistics of a product’s journey from production to sale.

While ex-factory costs give the initial production price, landed costs take a more comprehensive view by including all the expenses required to get the product to its final destination. By understanding these two concepts and their respective responsibilities, retail and wholesale brands can make more informed pricing decisions, ensuring their products are profitable and competitively priced in the market.

In this guide, we will explore what each of these terms means, the responsibilities of each party involved, and how they influence final pricing decisions.

1. Ex-Factory Cost: The Manufacturer’s Price Point

Ex-factory cost (sometimes referred to as “ex-works” or “ex-plant”) is the baseline price of goods as they leave the manufacturer’s facility. It represents the cost of producing the item, but nothing beyond that. Here’s what is typically included and excluded in ex-factory pricing:

Included in ex-factory cost:

• Raw materials used in production
• Labor and manufacturing costs
• Overhead costs at the factory

Excluded from ex-factory cost:

• Shipping and freight
• Handling and packaging beyond factory delivery
• Insurance
• Customs and import duties
• Any other costs incurred during the transportation process

In other words, ex-factory cost is the price of the product at the factory gate. Once the goods leave the manufacturer’s premises, the buyer assumes responsibility for all additional costs associated with getting the product to its final destination.

Responsibilities of the Buyer (After Ex-Factory):

• Transportation: Organizing and paying for the shipment of goods from the factory to the final destination.
• Insurance: Covering any insurance required for goods in transit.
• Customs clearance: Paying import duties, tariffs, and taxes.
• Handling fees: Any other logistical expenses incurred while moving goods through the supply chain.

This approach is common when a manufacturer wants to keep their role limited to production and does not wish to get involved in logistics or shipping. It is also beneficial for buyers who have strong logistics networks or can negotiate better shipping and handling rates.

2. Landed Cost: The Full Picture of Product Pricing

While the ex-factory cost is crucial for understanding the production price, it does not give the full picture of how much it costs to get the product into the buyer’s hands. This is where landed cost comes in.

Landed cost includes the ex-factory price as well as all the additional expenses required to get the product to its final destination. By considering these factors, businesses can get a more accurate sense of the total investment needed to bring a product to market, especially when importing from other countries.

Components of Landed Cost:

• Ex-factory cost: The price paid to the manufacturer.
• Freight and shipping: Charges for transporting goods via air, sea, rail, or road.
• Handling fees: Expenses related to managing the product during transit, including loading, unloading, warehousing, and packaging.
• Insurance: Coverage for goods in transit to protect against damage or loss.
• Customs duties and import taxes: Fees imposed by the importing country to bring goods into their market.
• Currency exchange rates: Fluctuations in currency values can impact the final cost for international transactions.

Why Landed Cost Matters:

• Accurate pricing: It provides a more accurate estimate of the true cost of goods, helping companies set profitable wholesale prices.
• Profit margins: By calculating the full cost of acquisition, retailers can better determine their profit margins and price their products competitively.
• Supply chain decisions: Knowing the landed cost helps businesses decide whether a particular supplier or shipping route is cost-effective.

3. How Ex-Factory and Landed Costs Influence Retail Pricing

Retailers and wholesalers need to determine how much to charge for a product to maintain profitability, and understanding both ex-factory and landed costs is key to this process. Here’s how each cost impacts pricing decisions:

Ex-factory pricing impact: When negotiating with manufacturers, buyers will often try to get the lowest possible ex-factory cost, but this is only the starting point. If the ex-factory cost is too high, it will leave little room for absorbing transportation and import costs while maintaining profitable margins.

Landed cost pricing impact: The landed cost provides a more holistic understanding of how much the goods actually cost to acquire. This allows retailers to factor in all the expenses involved and set a final wholesale or retail price that covers these costs while maintaining a profit margin.

For businesses that import goods, failing to calculate landed costs properly can lead to underpricing products, which can severely erode profitability.

4. Responsibilities of Each Party in the Supply Chain

In the journey from manufacturer to retailer, the ex-factory price and landed cost help define who is responsible for which part of the process.

Manufacturer Responsibilities (Ex-Factory Stage):

• Producing the goods according to agreed specifications.
• Setting a fair ex-factory price that reflects the production cost.
• Handing over the goods at the factory gate to the buyer or their chosen logistics partner.

Buyer/Importer Responsibilities (Landed Cost Stage):

• Arranging for and covering the cost of shipping and freight from the factory to the destination.
• Managing insurance for the goods during transit.
• Dealing with customs, import duties, and taxes.
• Handling any warehousing or storage fees if applicable.
• Ensuring that all these costs are accounted for when determining final pricing.

5. Key Considerations for Setting Prices in Retail Wholesale

Know your ex-factory and landed costs: Understanding both costs ensures that businesses don’t underestimate the true cost of bringing a product to market. This helps avoid pricing errors that could hurt profitability.

Build in a profit margin: After accounting for all landed costs, ensure that you still have a healthy profit margin. For wholesale pricing, it’s common to aim for a margin of at least 50%.

Anticipate fluctuations: Keep in mind that landed costs can change due to factors like currency fluctuations, fuel price changes, or customs duty alterations. Always allow some flexibility in your pricing strategy to account for unexpected increases in landed costs.

Read The Expert Guide: How to Price Your Brand’s Products for Maximum Profit here