Determining the Landed Cost, also known as Validation, is a great place to set the foundation for sourcing your product. During Validation, you can organize your project and get everything in place for the full sourcing. For most projects, this should be the first natural step in starting your sourcing journey or second only to selecting your product idea and developing a product spec sheet. This step also calculates the landed costs of an item.

Most of the time, we feel it’s wise to validate the final product specification sheet, or when you have a vague idea about a product or a niche a client wishes to tackle. Validation enables you to determine whether your product can be manufactured and, if so, whether it will be profitable.

Validation is not full sourcing, but it is a complementary service performed in advance to establish the foundation for sourcing later. Its purpose is to determine a product's feasibility and get an early cost analysis.

What is Landed Cost?

Knowing the Landed costs helps determine if your product can be manufactured, estimates the cost, and provides insight into any regulatory, customs, or manufacturing challenges you might encounter.

The goal of a product validation report is:

To determine if your product can be made.
If a factory can make it, can it be profitable and made as you want
To determine what manufacturing capabilities are needed.
A high and low examination of the total landed cost.
A high and low estimation of the lead time for manufacturing
Regulatory issues or compliance are needed for the product
Are there any tariffs or duties on your product?

This section will cover each step to source your product confidently.

Why Validate Your Product?

There are several reasons to validate your product before starting the sourcing process, including due diligence, cost analysis, and anticipating potential challenges in advance.

Due Diligence

Product validation involves conducting thorough due diligence on a product to ensure it is feasible and worth the investment of time and resources required for manufacturing. It will uncover your product’s duties, tariffs, customs, and import fees. Validation should also find any certification and compliance issues your product may have. Unfortunately, too many buyers trust their suppliers or freight forwarders to resolve these issues. In reality, the buyer is responsible for knowing what is needed to import a product into their respective country.

Figure out the Landed Cost

The landed cost is the total cost to manufacture and ship your product to its final destination, which is typically an Amazon fulfillment center, a third-party fulfillment center, or your own business.

Landed Cost = Total Manufacturing Cost + Fixed cost + Shipping + packaging + Duty/Fees/Customs

Product Validation will provide an early cost analysis of your product, allowing you to determine the cost and assess its profitability. The goal is to determine the total landed cost of manufacturing, shipping, preparation, and fulfillment of a product batch. In the end, you should add the total manufacturing cost, fixed costs, shipping, duty, fees, and customs to arrive at the total. Next, you should research similar products already on the market to determine their feasibility.

The rule of thumb is ⅓ for making and shipping your product, +⅓ to pay Amazon, and +⅓ for yourself (profit).

Many people will start at the end and determine the ideal landed cost, while others will start with the manufacturing cost and determine the final target price. Ultimately, the profit margins and final pricing (what you’ll charge the end customer) are up to you.

A screenshot of a completed pricing breakdown

OF NOTE: Two types of product validation differ significantly – manufacturing validation and marketing validation. Marketing validation involves testing the market to determine if there is demand for your product, while manufacturing validation assesses the feasibility of producing it. While Cosmo offers manufacturing validation, we do not currently provide market validation.

What do you need to start?

A product specification sheet is all you need to start validation. The level of detail in the product specifications sheet will depend on the product and your progress. Since this is an early sourcing effort, the goal is to obtain basic quotes and determine if a product can be manufactured, as well as what it takes to do so. There is no need to worry if you don’t have every tiny detail of your product figured out. If you don’t have a product specification sheet yet, check out our guide on creating one: https://www.cosmosourcing.com/blog/how-to-create-a-great-product-specification-sheet.

Some people know exactly what they want and will have a fully detailed product spec sheet before they start validation. Some people will begin product validation with a basic product specification sheet and then refine and finalize the product spec sheet at the end of the validation phase. There are many reasons to keep your product specification sheet flexible. For example, you may not know what it takes to create your product, so you make the final sheet based on the manufacturing requirements. Perhaps you learn that a supplier offers a broader range of customization than expected.

To be clear, the more detailed your product specification, the more precise your responses will be. As we receive estimates, the highs and lows will align with the final numbers, accompanied by a more detailed product specification sheet.

How to do Product Validation

Product validation isn’t overly complicated. We broke it down into a few simple steps for you to complete. When you are done, you should have all the necessary information to start sourcing.

Find Suitable Factories for Quotes

As mentioned earlier, product validation should set the foundation for the sourcing stage. Thus, when looking for factories and suppliers for this step, ensure they are of sufficient quality to be used later. Generally, I conduct a simple search for factories in this step. In contrast, in the sourcing step, I delve into extreme depth, utilizing a wide range of resources, including customs data, trade shows, and more.

During the product validation phase, you only need to use websites such as Alibaba, Global Sources, or Made-in-China. You can find a complete list of sites where you can locate suppliers here: https://www.cosmosourcing.com/blog/how-to-create-a-great-product-specification-sheet. Then, search for your product; you should get a decent list of potential suppliers. Once you have found suppliers, you can proceed to the next step.

Reach out to the suppliers, get quotes & manufacturing details

During the product validation phase, you should seek soft quotes. Soft quotes are quick estimates provided by a supplier to give you a solid idea of the price, rather than a definitive hard quote that can be acted upon.

In the previous steps, you should have prepared a product specification sheet and a request for quotation (RFQ). When you message a supplier, this is the first time you should send messages to potential suppliers. You should use the previously created RFQ and attach your product spec sheet. You should also utilize the free “request for quote” tools offered by Alibaba and other sourcing websites.

You can Follow the “Submit RFQ” or “One Request, Multiple Quote” to submit your RFQ. Both links go o the same page.

When messaging suppliers, include all relevant product details, your expected order quantity, and the country to which you are shipping, and request a quote. Since you’re only getting a basic soft quote at this point, you don’t need to delve into too much detail. Please keep it simple for now, as we’ll delve into greater complexity later in the sourcing process.

I usually only message a few factories at first. I like to use one trick to start with factories that I think are good but not great. The reason for this is that I want to gauge the response of the factories and tweak my message to get a better response from my preferred potential suppliers.

Once you have established contact with a few factories, please ask them for details about their facilities and what it takes to manufacture your product. For instance, if you need fabric printing done, ask about sublimation or screen printing. If you don’t know the difference, ask them to explain it to you. They’ll likely answer in detail; as a result, you’ll know more about that aspect of manufacturing, and you can tweak your product spec sheet or message accordingly. So, take advantage of this step to learn all the details about your product.

A good factory, or at least one that excels at establishing a relationship with its customers, will be able and willing to answer most of your questions, including the basic ones. When you first talk to a supplier, it is the best time to ask about the items you want and need to know about the product. Once you reach the complete sourcing phase, you should be an expert in your product and understand what it takes to produce it. Then, after a bit of back and forth, be sure to thank them for their time and let them know that you will follow up with them later regarding the full order.

Organizing Quotes

As stated earlier, validation sets a foundation for the full sourcing phase. Because organizing your quotes and responses is one of the critical building blocks of sourcing, we use the same Excel spreadsheet in the full sourcing report.

You should have responses from about a dozen or more suppliers by now. Using Excel, separate the following information into different cells:

Input this info across the top row:

Suppliers name
Website
Contact name
Supplier Email
MOQ (Minimum Order Quantity)
Cost Per Unit
Product Cost
Shipping
Notes
Total Cost (MOQ x Cost per unit)

And down the first column, add the names of your suppliers.

With this info, you should have a basic but well-organized spreadsheet to manage the quotes and factories. Our spreadsheet has significantly more details, but this should be sufficient for most people.

When making the estimations, only include quotes you view as legitimate. Since there is no correct method, it ends up as something you’ll perfect the more you do it. Regardless, we did try to summarize the best strategies here: https://www.cosmosourcing.com/blog/how-to-avoid-scams-when-sourcing-for-fba-china-vietnam.

Get Shipping Quotes

When speaking with potential suppliers, ask them about their packaging methods and procedures. Usually, items are placed individually in a box, and then those boxes are placed in a larger box, often referred to as a master carton. First, ask them about the weight, dimensions, and quantity of the master carton, and then use one of the free online tools to obtain shipping quotes.

I have a few freight forwarders that I reach out to get early quotes, but there are some free tools that you can check out:

The following items are the information you’ll need to get a quote from a freight forwarder.

HS or HTS code
Master Carton Dimensions (HxWxD)
Total number of cartons
Carton weight
Carton gross weight
Incoterm
Origin
Destination

Since we are just getting a solid estimation, most people do not need to contact freight forwarders, which we will discuss in more detail. Shipping by sea will be significantly cheaper than shipping by air. However, shipping by air will be quicker.

Another aspect to consider is the Incoterms. These are the shipping terms for your products. Incoterms will be discussed in a later chapter, or you can read the blog post about them here: https://www.cosmosourcing.com/blog/incoterms-defined-fob-exw.

Since we are keeping it simple, please ask your supplier to quote EXW (items available at the factory) and FOB (items available for pickup at the closest port to the factory). When obtaining a quote from your factory, you must specify the shipping terms and inform the freight forwarder of these terms. It’s much easier for a freight forwarder to pick up the goods at a port, and most of our projects use the FOB (Free on Board) method.

How to find the tariffs of your product

By now, you should be aware that the US has imposed a 10% tariff on approximately $200 billion worth of goods exported from China to the United States, and it is expected to rise to 25% on March 1st, pending the lack of a trade agreement. [Update May 2020: No agreement was reached, and there are now tariffs on $550 Billion, or 83%, of all Chinese goods imported into the US] Now, there is a great deal of uncertainty with the tariffs, but we will let you know how you can navigate it the best that you can. Even before the current trade dispute, buyers still had to pay duties and customs fees on a wide range of products shipped into the United States.

We wrote a more in-depth guide here: https://www.cosmosourcing.com/blog/guide-to-tariffs-customs-duty-import.

This section is written from an American perspective, but the process is relatively similar in Canada and the European Union.

Figuring out the HTS Code

One of the big things you need to know about your product is the HTS Code. HTS stands for Harmonized Tariff Schedule, and the US system determines what tariffs are placed on a product. Therefore, any product imported into the US must be accurately classified by its HTS code, and the USCBP will apply the tariffs accordingly. The HTS code is based on the International Harmonized System, a globally recognized trade classification system.

This part can be challenging, especially if it’s a new product that requires a significant amount of research to identify the correct product category. Of course, if you’re importing an existing product, then it should have a classification. However, if you are importing a new product that does not currently exist in the market, the easiest way to do so is to look for similar items or those made of the same material.

You can freely search the US database here: https://hts.usitc.gov/.

Ultimately, you should have an 8-10 digit number (####.##.####) that corresponds to your product. Now that you have that figured out, you can look up the tariffs.

Looking up the Tariffs of Your Product

This is for importing into the United States; however, almost every other country posts the rates on a publicly available government website. Primarily, the rates will be determined by the department or ministry responsible for trade. You can use the same HTS tool to look up your tariffs as you did to look up the HTS code: https://hts.usitc.gov/.

If you are importing from China into the United States, you can view the complete list of affected products and their tariffs here [PDF Warning]: https://ustr.gov/sites/default/files/2018-13248.pdf

Want to avoid tariffs?

Are you looking to avoid tariffs on Chinese goods? Sourcing from Vietnam is one of your best options. Cosmo Sourcing has been helping clients find suppliers in Vietnam since 2013 and plans to expand its services in the coming year. If you're interested, please visit our Vietnam Sourcing page or contact us at info@cosmosourcing.com.

Existing Tariffs and Duty Taxes

Please note that existing duties and fees still apply to most products, in addition to the new tariffs. You should find the existing duties using the same link to the HTS database. This database has the duty listed: https://hts.usitc.gov/

In the above, you’ll notice multiple columns from left to right. They are

Heading/Subheading, which is the HTS Number (4, 6, and 8 digits) Stat Suffix, combined with the Heading/Subheading, is the ten-digit HTS Number.
Article Description
Unit of Quantity
Tariff Rates
- General Rate of Duty
- Special Rate of Duty
- Column 2 Rate of Duty

This is just a quick summary; the full in-depth guide can be found here [PDF Warning] http://www.usitc.gov/documents/hts_external_guide.pdf

How to figure out Regulatory Issues when Importing from China

The most challenging aspect of the validation step is looking up regulatory issues. Unfortunately, there is no centralized database for the regulations required for each product.

The US’s best resource is Customs and Border Protection (CBP), which publishes several guides across a huge range of products and classifications. Are you unsure whether what you are importing is a bolt or a screw? They have a guide for that. Are you importing mittens? If they are crocheted or knitted, then–surprise–you’re getting tariffs! You’ll want to sit down for this one … Check out this groundbreaking decision on the difference between candle holders and decorative glass!

To add further complications, agencies such as the FDA and FCC regulate the importation of goods but defer enforcement to CBP. If you are importing anything relating to health or food, it’s most likely subject to FDA approval or regulations. If you are importing an electronic item, particularly one that emits radio waves, including but not limited to cellular, Wi-Fi, or Bluetooth devices, you need to obtain FCC approval. If you are importing natural food items, they are regulated by the US Department of Agriculture and may also be subject to the Food and Drug Administration (FDA). More agencies have regulations, but the FCC and FDA are the two we encounter the most. Ultimately, it’s up to you to research and find out the regulations.

The CBP is the agency responsible for clearing goods for export, so it is the final authority on this issue. If unsure, you can message the CBP and request a letter to classify or clarify the goods. However, as a government agency, it is affected by government shutdowns; therefore, at the time of this writing, it does not respond to any requests. Furthermore, even when the agency is open, there are no guarantees that it will respond; if it does, the response can take weeks. Therefore, we recommend you do the research yourself.

You can go to Customs and Border Protection’s website and see the complete list of guides. https://www.cbp.gov/trade/rulings/informed-compliance-publications

You’re Finished with Validation, Now What?

When you complete the product validation report, you will have a definitive answer of either ‘Yes’ or ‘No’ regarding whether a product can meet your requirements. If a factory can make it, you will also estimate the total landed cost (manufacturing cost + shipping + duty/fees +, etc.) and any potential regulatory issues.

If the validation comes up ‘No’, a factory cannot produce it, or a manufacturer cannot produce it profitably, you have two options.

Move on to another product.
Use the info to make radical fundamental changes to your product.

When you come up with ’YES’, your product can be tailored to your specifications, and then you can proceed to the full sourcing phase.

At the end of the product validation step, you should have a much better understanding of your product, the manufacturing requirements, and more. It is common for people to revisit and modify parts of their product based on the information they learned during validation. One of the reasons is to make it cheaper or easier to make and source. At this point, you may want to review and update your product specification sheet. You can start sourcing your product once you finish the new product spec sheet.

Cosmo Sourcing // Go Straight To The Source!

Would you like our team to identify top manufacturers, obtain quotes, and connect you directly with excellent suppliers?

Our Simple Sourcing service is designed to do everything to turn your idea into a shipped product. Our services are designed to take your idea, turn it into a product, and ship it to its final destination. Cosmo can handle everything from creating a product spec sheet to validating, sourcing, ordering, evaluating samples, arranging inspections, finding freight forwarders, ensuring quality assurance, negotiating, and shipping. We aim to handle every single step of your business in Vietnam for you.

If you start a new business, finding products and suppliers for your products is one of many things you need to handle. Our services are designed to handle every aspect of your business in China and Vietnam, allowing you to focus on growing your own business.

We have helped clients from Fortune 500 companies, brick-and-mortar stores, FBA sellers, and brand-new businesses. So don’t hesitate to contact us and let us know how we can help you.

How To Calculate Landed Costs For Product Sourcing // What Is Landed Cost?