Why Is the Quoted Price Misleading?
One of the most common decision-making errors in international trade is comparing offers purely on the basis of the net price. A FOB offer of €100,000 and a DDP offer of €115,000 may appear to represent different price levels at first glance, but they do not reflect identical terms.
The Incoterms 2020 rules define who pays for freight, insurance, customs duties, and taxes, and where risk transfers. If this is not precisely interpreted, the decision is not a well-informed financial one but is based on assumptions. In that case, the price is not useful information – it is a source of misunderstanding.
How the System Works
The essence of the Incoterms system is the unambiguous definition of cost and responsibility transfer points.
EXW (Ex Works): the seller fulfils at their own premises. The full logistics and customs handling is the buyer's responsibility. The price is low, but risk and operational control are concentrated with the buyer.
FOB (Free On Board): a term used in sea transport. The seller is responsible for the goods until they are loaded on board. The ocean freight, insurance, and destination costs are borne by the buyer. FOB therefore means "loaded on board," not "delivered."
CIF (Cost, Insurance and Freight): the seller pays for ocean freight and minimum insurance to the port of destination. However, risk transfers at the port of origin. Cost and responsibility do not meet at the same point.
DDP (Delivered Duty Paid): the seller bears the cost of shipping, insurance, customs duties, and taxes to the destination. DDP often appears to be the simplest option, but behind it lies a complex structure of customs and tax handling.
In every case, the decision basis is the calculation of the Total Landed Cost.
Practical Consequences
In the case of a FOB-based import from Asia, the manufacturer price seemed competitive. Adding ocean freight, port costs, insurance, customs duty, VAT financing, and storage, however, raised the final landed cost by nearly 20%.
The same transaction under DDP showed a higher initial price, but a more predictable cost structure. The difference was not in the starting price but in the risk model.
Incoterms selection also has an impact on liquidity, inventory levels, financing needs, and insurance exposure. This is why the price must never be interpreted in isolation.
What Should the Decision-Maker Ask?
Before accepting an offer, it is worth clarifying the applicable Incoterms term:
- Where does risk transfer?
- Who pays for freight and insurance?
- Who handles customs clearance?
- What is the Total Landed Cost?
- What impact does the given construction have on cash flow?
Interpreting Incoterms 2020 rules is not a logistics technicality – it is a core business decision competence.
Summary
A price in international trade can only be understood together with the conditions attached to it. FOB, CIF, or DDP constructions represent different cost and risk allocations that significantly affect the Total Landed Cost. The basis of a competitive decision is not the lower number, but a precise knowledge of the liability points and risks involved.
Key Questions
What does FOB mean? Under FOB (Free On Board), the seller is responsible for the goods until they are loaded on board; from that point, the buyer bears the risk and further costs.
When is DDP worth choosing? When the buyer wants a simple, fully calculated price and does not wish to deal with customs or logistics administration. It is worth noting that this is often very difficult to implement from the seller's side.
What is Total Landed Cost? The sum of manufacturer price, freight, insurance, customs duties, taxes, and financing costs.
