The Line Most Landed Cost Calculations Get Wrong
Ask an importer how they calculate landed cost and you'll usually get a good answer.
Unit price, freight, insurance, duty, port charges, customs clearance, inland haulage, storage. Most businesses that import at any scale have this modelled properly, often to two decimal places.
Then there's a cell in the spreadsheet with an exchange rate in it, and that cell has had less thought applied than any other input on the sheet.
The problem with the rate cell
Your landed cost model converts a foreign currency purchase price into sterling. Whatever rate sits in that cell drives your unit cost, your margin calculation, your retail price and your profitability forecast for the whole product line.
Three ways it typically gets filled in, all flawed:
Today's rate. Accurate for about a day. Your supplier payment might be 60 days out and the stock might sell for six months.
Last year's average. Historically interesting, predictively useless.
A round number someone chose once. 1.25, 1.20, 1.15 — a figure adopted in a meeting some time ago that nobody has revisited, now embedded across every product line in the business.
The consequence isn't a small inaccuracy. It's that your entire margin analysis is built on a number that was never true for long and isn't true now.
The fix: use a rate you can actually secure
If you're paying a supplier in 90 days, the correct rate for your landed cost model is the 90-day forward rate — because that's the rate genuinely available to you for that date.
Then book it. Once the forward is in place, the number in your model isn't an assumption any more. It's a contracted fact, and your landed cost is fixed before the goods ship.
This changes the model from a forecast into a calculation.
It also makes the downstream numbers defensible. A buyer who can say "this line delivers 34% gross margin" and mean it — rather than "34% if sterling holds" — is running a different quality of business.
Where the currency line hides elsewhere
Beyond the purchase price, several landed cost components are also foreign currency denominated and routinely converted at a different rate on a different day:
Freight, often quoted and invoiced in dollars regardless of route
Insurance, sometimes in the currency of the shipment value
Foreign port and handling charges
Duty, calculated on a customs value converted at HMRC's published monthly rate — which is not the rate you'll pay, and is a separate number from your commercial rate
Supplier tooling, sampling and certification costs, frequently forgotten because they arrive outside the normal purchase cycle
The duty point catches people out. HMRC publishes exchange rates used for customs valuation purposes, fixed for a period. Your duty is calculated on that rate; your actual cost is at your commercial rate. They will differ, and the difference needs to be in the model rather than discovered at reconciliation.
A practical structure
Build the model with the currency assumption explicit and separated:
ComponentCurrencyAmountRate usedRate sourceGBPGoodsUSDForward, bookedFreightUSDForward / spotInsuranceGBPn/aDutyGBPHMRC publishedClearanceGBPn/a
The "rate source" column is the one that matters. It forces everyone using the model to see whether a number is contracted or assumed — and that distinction is invisible in most landed cost sheets.
Repricing discipline
If you sell from stock at fixed retail prices, your margin is set at purchase and locked until you reprice.
Decide in advance:
At what rate movement do you review pricing? A defined trigger — say 4% from your model rate — beats an annual review that happens to fall after a large move.
Do you hold a rate for a full season, or reprice in-season?
Who owns that decision, and what data do they see?
Most businesses reprice when margin pain becomes obvious in the management accounts, which is usually one or two quarters after the currency moved.
The test
Open your landed cost model. Find the exchange rate cell.
Ask three questions:
Where did this number come from?
Is it a rate we have contracted, or one we're assuming?
When was it last changed, and by whom?
If the answer to the first is "I'm not sure", you're pricing an entire product range off a figure nobody can account for — and every margin percentage downstream of it is an estimate presented as a fact.
William Fuller, Co-Founder of Orbis Exchange Group contact on 0203 918 5622
Ben James, Co-Founder of Orbis Exchange Group contact on 0203 918 5621