Incoterms Explained: Which Trade Terms Should Your Business Use and Why

What Incoterms are and why they matter#

Incoterms are 11 standardised trade terms published by the International Chamber of Commerce that define where seller responsibility ends and buyer responsibility begins — covering freight costs, insurance, customs clearance, and risk of loss or damage at each stage. They are legally binding when included in a sales contract. Using the wrong Incoterm can mean paying for costs you thought the supplier was covering — or finding yourself responsible for a customs problem in a country where you have no infrastructure.

The Incoterms most small importers encounter#

EXW (Ex Works): buyer takes responsibility from the seller's factory door — you pay for everything including local transport in the origin country, export customs, international freight, import customs, and delivery to your warehouse. Maximum complexity for the buyer. FOB (Free On Board): seller delivers to origin port and handles export customs. Buyer pays for international freight, insurance, import customs, and delivery from destination port. The most common term for ocean freight from Asia. CIF (Cost, Insurance, Freight): seller pays for international freight and insurance to destination port. Buyer handles import customs and inland delivery. DDP (Delivered Duty Paid): seller handles everything including import customs and delivers to your warehouse. Maximum simplicity for the buyer — but at a premium.

Why FOB is often better than DDP for growing importers#

DDP sounds attractive — the supplier handles everything. But it comes at a cost. When the supplier arranges freight and customs, they add a margin to the actual cost and you have no visibility or control over the logistics choices made. You cannot compare freight quotes, choose your customs broker, or see the actual duty paid. Under FOB, you control the freight booking, can negotiate competitive rates, choose your own customs agent, and have full visibility of every cost. For importers above £500,000 in annual import value, the savings from controlling your own logistics under FOB typically outweigh the added complexity.

Risk transfer in each Incoterm#

Under FOB, risk transfers to the buyer when goods pass over the ship's rail at the origin port — if goods are damaged during loading or lost at sea, the buyer bears the loss (and should hold marine insurance). Under CIF, the seller provides insurance but risk still transfers to the buyer at the origin port — the insurance protects the buyer but they still bear the loss until the insurer pays. Under DDP, the seller bears all risk until delivery to the buyer's warehouse.

Incoterms and your landed cost calculation#

The Incoterm affects which costs appear in your landed cost calculation. Under FOB: your landed cost includes the FOB price plus your freight, insurance, import duty, customs agent fee, and inland delivery. Under DDP: your landed cost is simply the DDP price — all costs bundled. For margin analysis, DDP simplifies the calculation but hides the individual cost components that you need to manage and negotiate separately.