Incoterms Explained: How Shipping Terms Affect Your Bottom Line

What Are Incoterms?

Incoterms (International Commercial Terms) are standardised trade terms published by the International Chamber of Commerce (ICC). They define the responsibilities of buyers and sellers in international transactions — specifically, who pays for shipping, insurance, and customs at each stage.

The current version is Incoterms 2020, and they're used worldwide regardless of which countries are involved in the trade.

The Most Common Incoterms

EXW (Ex Works)

The seller makes the product available at their premises. You are responsible for everything — collection, export clearance, freight, import clearance, and delivery.

• Best for: Experienced importers who want full control over logistics
• Risk: You bear all transport risk from the supplier's door

FOB (Free On Board)

The seller delivers goods onto the vessel at the port of origin. Once loaded, risk and cost transfer to you.

• Best for: Most importers shipping by sea — you control the main freight
• Risk: You're responsible once goods are on the ship

CIF (Cost, Insurance, Freight)

The seller pays for freight and insurance to the destination port. However, risk transfers to you once goods are loaded at the origin port.

• Best for: Importers who want a simple quote that covers transport
• Watch out: The seller chooses the cheapest insurance, which may not be adequate

DDP (Delivered Duty Paid)

The seller handles everything — freight, insurance, import clearance, duties, and delivery to your warehouse.

• Best for: Small orders where you want simplicity
• Risk: You lose visibility into the cost breakdown, making it harder to optimise

How Incoterms Affect Your Landed Cost

The Incoterm you choose directly determines which costs appear on your landed cost calculation:

Choosing the Right Incoterm

There's no universally "best" Incoterm. Consider:

1. Your experience level — new importers often start with CIF or DDP for simplicity
2. Order size — larger orders justify managing your own freight (FOB) for cost savings
3. Shipping relationships — if you have good forwarder rates, FOB gives you more control
4. Cost transparency — EXW and FOB give you more visibility into each cost component

The most important thing is to understand exactly what's included in your supplier's price and what additional costs you'll need to budget for.