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Incoterms and Why It's Important

Incoterms and Why It's Important

Phuc Le
May 17, 2023

If you're an eCommerce seller who wants to expand your business globally, you need to know about incoterms. Incoterms are a set of rules that define the responsibilities and risks of both buyers and sellers in international trade. They specify who pays for what, when and where the goods are delivered, and who handles the customs clearance and insurance.

Why are incoterms important? Because they can save you a lot of time, money and hassle when you ship your products across borders. They can also help you avoid disputes and misunderstandings with your customers and suppliers. And they can make your logistics more efficient and reliable.

But incoterms are not always easy to understand. There are 11 different incoterms, each with its own abbreviations and meanings. Some of them are more suitable for certain modes of transport, such as sea, air or land. Some of them are more favorable for sellers, while others are more favorable for buyers. And some of them have changed over time, as new versions of incoterms are released every 10 years. The latest version of incoterms is Incoterms 2020, which came into effect on January 1st, 2020. It introduced some changes and clarifications to the previous version, Incoterms 2010.

How are these incoterms different from each other?

How are these incoterms different from each other?

Generally speaking, they are divided into two categories: sea and inland waterway transport only, and any mode of transport. The first category includes four incoterms: FAS, FOB, CFR, CIF. The second category includes seven incoterms: EXW, FCA, CPT, CIP, DAP, DPU, DDP. Here is a brief overview of each one:

  1. EXW (Ex Works): The seller delivers the goods to the buyer at a specified location, which could be the seller's premises, a factory, or a warehouse. The seller does not need to load the goods onto a vehicle or clear them for export, unless required. It's a great option for buyers who prefer to handle transportation and customs clearance themselves.
  2. FCA (Free Carrier): The seller has two options to deliver the goods to the buyer. If the named place for delivery is the seller's premises, the seller delivers the goods by loading them onto the transportation arranged by the buyer. If the named place for delivery is a location other than the seller's premises, the seller delivers the goods by loading them onto their own means of transport and transporting them to the named place for unloading, where they are then at the disposal of the carrier or another person nominated by the buyer. The place of delivery chosen will determine where the risk of loss transfers to the buyer and when the buyer is responsible for any costs associated with the goods.
  3. FAS (Free Alongside Ship): The seller delivers the goods when they are placed alongside the ship, which could be on a quay or a barge nominated by the buyer at the port of shipment, or when the seller arranges for the goods to be delivered in this way. The risk of loss or damage to the goods is transferred to the buyer once the goods are placed alongside the ship. From this moment on, the buyer is responsible for all costs associated with the goods.
  4. FOB (Free On Board): The seller can either deliver the goods on board the vessel nominated by the buyer at the named port of shipment or arrange for the goods to be delivered in this manner. The risk of loss or damage to the goods is transferred to the buyer once the goods are on board the vessel. From this point forward, the buyer is responsible for all costs associated with the goods.
  5. CFR (Cost and Freight): The seller can either deliver the goods on board the vessel or arrange for the goods to be delivered in this manner. The risk of loss or damage to the goods is transferred to the buyer once the goods are on board the vessel. It is important to note that in CFR, the seller is considered to have fulfilled their obligation to deliver the goods, even if the goods are damaged, not delivered in the stated quantity, or fail to reach their destination. The seller is not responsible for purchasing insurance coverage, so it is recommended that the buyer obtains their own insurance.
  6. CIF (Cost, Insurance and Freight): The seller is responsible for delivering the goods to the buyer on board the vessel or obtaining the goods that have already been delivered. The risk of loss or damage to the goods is transferred to the buyer once the goods are on board the vessel. This means that the seller has fulfilled their obligation to deliver the goods regardless of whether the goods arrive at their destination in good condition, the correct quantity, or not at all.
  7. CPT (Carriage Paid To): The seller delivers the goods to the buyer by handing them over to the carrier contracted by the seller or procuring the goods already delivered. The seller should ensure that the carrier takes possession of the goods in the appropriate manner and location for the mode of transportation used. After the goods have been delivered to the buyer in this manner, the seller no longer guarantees their condition, quantity, or successful delivery to the intended destination. This is because the risk of loss or damage to the goods transfers from the seller to the buyer upon delivery to the carrier. However, the seller is still responsible for arranging transportation for the goods from the delivery location to the agreed-upon destination.
  8. CIP (Carriage and Insurance Paid To): The seller delivers the goods to the buyer by handing them over to the carrier contracted by the seller or procuring the goods already delivered. The seller should ensure that the carrier takes possession of the goods in the appropriate manner and location for the mode of transportation used. After the goods have been delivered to the buyer in this manner, the seller no longer guarantees their condition, quantity, or successful delivery to the intended destination. This is because the risk of loss or damage to the goods transfers from the seller to the buyer upon delivery to the carrier. However, the seller is still responsible for arranging transportation for the goods from the delivery location to the agreed-upon destination and must also secure insurance coverage for the goods during transport.
  9. DAP (Delivered At Place): The seller takes responsibility for the goods and risks involved in bringing the goods to the named place of destination or the agreed point within that place. The goods are considered delivered to the buyer when they are placed at their disposal on the means of transport ready for unloading at the named place of destination or the agreed point within that place. This Incoterms rule implies that delivery and arrival at the destination are synonymous.
  10. DPU (Delivered At Place Unloaded): The seller bears all the risks involved in bringing the goods to the named place of destination and unloading them there. The seller transfers the goods' responsibility and risk to the buyer when the goods are unloaded from the arriving means of transport and placed at the buyer's disposal at the named place of destination or the agreed point within that place. This Incoterms rule signifies that delivery and arrival at the destination are the same. DPU is the only Incoterms rule that obligates the seller to unload the goods at the destination. As a result, the seller must ensure that they can arrange for unloading at the named location. If the parties do not want the seller to bear the risk and cost of unloading, they should avoid using the DPU rule and opt for DAP instead.
  11. DDP (Delivered Duty Paid): The seller is responsible for delivering the goods to the buyer and transferring the risk to them when the goods are made available to the buyer at the named place of destination or an agreed point within that place. The seller bears all risks involved in bringing the goods to that place, and the delivery and arrival at the destination are the same under this Incoterms rule. The goods should also be cleared for import, and the seller is responsible for all costs associated with importing the goods into the destination country.

So how do you choose the right incoterm for your eCommerce business? 

So how do you choose the right incoterm for your eCommerce business?

So how do you choose the right incoterm for your eCommerce business?

There is no definitive answer to this question, as it depends on various factors such as your product type, your target market, your shipping method, your customer expectations, and your competitive advantage. However, here are some general guidelines to help you make an informed decision:

  • If you want to have more control over the shipping process and offer a better customer experience, you may want to choose an incoterm that gives you more responsibility and risk, such as DAP or DDP. This way, you can ensure that your goods are delivered on time and in good condition, and that your customers don't have to deal with any customs issues or hidden fees. However, this also means that you have to bear more costs and liabilities, so you need to factor that into your pricing strategy and profit margin.
  • If you want to reduce your shipping costs and liabilities, you may want to choose an incoterm that gives you less responsibility and risk, such as EXW or FCA. This way, you can transfer most of the costs and risks to the buyer or their carrier. However, this also means that you have less control over the shipping process and customer satisfaction. You may lose some customers who prefer a more convenient and transparent delivery service or who are not familiar with the customs procedures in their country.
  • If you want to balance your costs and benefits, you may want to choose an incoterm that splits the responsibility and risk between you and the buyer, such as CPT or CIP. This way, you can share some of the costs and risks with the buyer or their carrier while still maintaining some control over the shipping process. However, this also means that you have to coordinate with the buyer or their carrier on the delivery terms and conditions.

As you can see, choosing an incoterm is not a simple task. It requires a lot of research and analysis of your business goals and customer needs. You also need to keep up with the latest changes and trends in international trade regulations and practices. For example, did you know that there is a new version of incoterms coming out in 2023? The International Chamber of Commerce (ICC) is currently working on updating the incoterms rules to reflect the current realities of global commerce.

One of the main changes expected in the new version is the introduction of a new incoterm called CNI (Cost and Insurance). This incoterm will be similar to CFR but will include insurance coverage for the goods during transit. Another change expected is the renaming of DPU to DPP (Delivered at Place Paid). This incoterm will be similar to DPU but will require the seller to pay for unloading costs at the destination.

Case studies: How incoterms impact eCommerce business

Example 1: An eCommerce business located in Texas sells a pair of cowboy boots to a customer in Canada using the FOB (Free on Board) Incoterm. This means the eCommerce business is responsible for getting the boots to the port of loading in the US, and the customer takes over the responsibility and cost of shipping them to Canada. Yeehaw, sounds easy, right? Well, not if your customer forgets to arrange the shipping and your boots end up sitting at the port for weeks, collecting dust and fees. Meanwhile, your customer is stuck barefoot and angry, and leaves you a bad review online. Talk about a wild ride!

Example 2: An eCommerce business located in China sells a batch of handcrafted terracotta warriors to a customer in the UK using the DDP (Delivered Duty Paid) Incoterm. The business is responsible for delivering the goods to the customer's door and paying all taxes and duties associated with the goods. However, the business underestimates the taxes and duties, resulting in a higher-than-expected cost. The business must then either absorb the extra cost or pass it on to the customer, which could result in an angry customer and lost sales. Looks like they underestimated the size of the challenge!

Example 3: An eCommerce business located in India sells a shipment of spices to a customer in the US using the DAP (Delivered At Place) Incoterm. The business is responsible for delivering the goods to the agreed-upon place, but not for unloading them. The customer has arranged for a third-party logistics provider to unload the goods, but the provider refuses to do so, claiming that it is not their responsibility. The customer is left with a shipment of aromatic spices sitting in the truck, and the eCommerce business may be held responsible for any damages or additional costs. This is enough to make your nose twitch!

Example 4: An eCommerce business located in the UK sells a shipment of tea to a customer in Japan using the FOB (Free On Board) Incoterm. The business is responsible for loading the goods on board the vessel, but not for the cost of shipping or insurance. However, the business fails to properly secure the goods, and they are damaged during loading. The customer refuses to accept the damaged tea, and the eCommerce business must either absorb the cost of the damaged goods or try to recover the cost from the carrier. Looks like this tea is not exactly steeped in success!

Example 5: An eCommerce business located in the US sells a batch of surfboards to a customer in Brazil using the EXW (Ex Works) Incoterm. The business is only responsible for making the goods available at their premises. The customer arranges for the shipping, but the surfboards get lost in transit. The customer demands a refund, but the eCommerce business argues that they fulfilled their responsibility by making the surfboards available at their premises. This could result in a dispute and a damaged business relationship. Looks like this business wiped out!

As you can see, choosing the right incoterm for your e-commerce business can make a big difference in your profitability and customer satisfaction. That's why it's important to do your research and consult with a logistics service provider who has expertise in cross-border eCommerce. They can help you find the best incoterm for your product, market, and budget, and ensure a smooth and successful international delivery.

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