Total Landed Cost vs. Total Cost of Ownership

Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, you'll learn what makes total landed cost different from total cost of ownership. You'll learn when you should use one over the other and how you can calculate each.

Total Landed Cost

Imagine that you are a business owner. You make lotions. To make your lotions, you source herbs and essential oils from all over the world. So each of your lotions costs differently depending on its ingredients. For example, a rare flower from mountainsides of India will cost more than a local commonly available field flower. To help you figure out just how much to charge for each lotion, you use what is called your total landed cost when figuring out how much it costs you to get your ingredients shipped to your warehouse where you make the lotions. Total landed cost includes the cost of your actual ingredient along with all the costs associated with getting that ingredient to your location. Things such as shipping, insurance, customs, and taxes are included. If the products aren't being shipped, then total landed cost includes the cost to pickup the products from the suppliers (things such as wages, gas, and wear and tear on the vehicle).

Total landed cost includes things such as shipping costs
tlc and tco

When to Use TLC

Use total landed cost, TLC for short, when you are deciding where to get your materials, supplies, and ingredients from. Even if two supplies are priced the same, it doesn't mean they have the same total landed cost. One might actually cost more than the other after all your costs associated with getting the product to you are calculated.

For example, for your lotions company, you need to order empty plastic bottles. You are trying to decide between two different suppliers for the same bottle. Both suppliers have the same $1.20 cost per bottle. One is located in the same state and country as your company. The other is located in an overseas country. The shipping costs are vastly different. The one located in the same state and country as you has a shipping cost of $20 per a case of 1,000 bottles. The supplier located in a different country has a shipping and customs fee of $100 per 1,000 case of bottles. Now, you sell a lot of lotions, so you buy your bottles in lots of 5,000.

Calculating your total landed cost for each supplier gives you the following.

For the same state and country supplier, your total landed cost is this.

  • 5,000 * $1.20 + 5 * $20 = $6,000 + $100 = $6,100

For the supplier in a different country, the total landed cost is this.

  • 5,000 * 1.20 + 5 * $100 = $6,000 + $500 = $6,500

Wow, that's a different of $400! If you didn't perform this total landed cost evaluation, you would think the bottles are priced the same. But, in reality, they aren't. So which would you choose? Of course you would choose the $6,100 supplier because you will be saving $400 compared to the other supplier. That $400 can go towards purchasing the other materials and ingredients you need to make your lotions.

Total Cost of Ownership

Your total landed cost is not the same as your total cost of ownership (TCO). Your TCO includes more. It actually includes your TLC. Your TCO includes your TLC plus all costs associated with the owning of the product such as proper storage and prepping costs.

For your lotions company, your TCO includes your TLC, the wages you pay your employees to prep and then use the ingredients for your lotion, and the cost to properly store the ingredients. Some of the fresh herbs you use must be refrigerated, so the cost to refrigerate your herbs is included in your TCO. Also, the wages you pay for someone to keep your supplies organized is also a part of your TCO for your company.

TCO calculations will vary depending on the business and how the business plans to use the product.

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