Incoterms Explained: What FOB, EXW and DDP Mean for Your Margins
Three letters on a factory quote decide who pays for freight, who pays duties and who carries the risk. Here is what FOB, EXW and DDP actually mean, in plain English.
Your factory quote says FOB. You are not sure what that means. You pay it anyway.
That is how most founders meet Incoterms. The expensive way.
Three letters on a quote decide who pays for freight. They decide who pays duties. They decide who carries the risk if a container goes missing. Get them wrong and your margin disappears before the goods even land.
Here is what they actually mean. No jargon. Just the version you need to quote, compare and price properly.
What Incoterms actually are
Incoterms are standard shipping terms used in global trade. They split the responsibility between you and the factory.
Each term answers three questions. Who pays to move the goods? Who handles customs? At what point does the risk become yours?
A quote without an Incoterm is not really a price. It is half a price.
Why this matters for your margin
Two factories quote the same product. One says $4.20 EXW. One says $4.80 FOB.
The cheaper one looks like the winner. It is not.
EXW means the price stops at the factory door. FOB means the factory gets your goods onto the ship. The gap between those two terms can be hundreds of dollars per order. Sometimes more.
You can only compare quotes when they sit on the same term. Otherwise you are comparing a full price to a partial one.
The three terms you will actually see
There are eleven Incoterms. You do not need all of them. For most product founders, three come up again and again.
EXW (Ex Works)
The factory makes the goods available at their door. That is the end of their job.
Everything after that is yours. Local transport in the origin country. Export clearance. Freight. Insurance. Customs at your end. All of it.
EXW gives you the most control. It also gives you the most work. Unless you have a freight forwarder who can collect from the factory, it is rarely the easy choice for a first order.
FOB (Free On Board)
This is the one you will see most. It is usually the sweet spot for founders.
The factory handles everything up to the ship. They cover local transport to the port. They handle export clearance. They load your goods onto the vessel.
From the moment it is on board, the cost and risk become yours. You arrange freight, insurance and customs at your destination.
FOB keeps the messy origin-country steps with the people who do them every day. The factory. You take over at a clean handover point. That is why we point most clients to FOB for their early orders.
DDP (Delivered Duty Paid)
The factory delivers to your door. They pay freight. They pay duties. They handle customs.
DDP looks like the simplest option. One price, no surprises. Sometimes that is true.
The catch is visibility. When the factory controls freight and duties, you cannot see what each part costs. You also rely on them to declare and clear goods correctly in a country they may not know well. A wrong customs declaration is your problem, not theirs.
DDP can work. Just ask for the full breakdown before you agree.
So which one should you ask for?
For most first orders, ask for an FOB quote.
It is comparable between suppliers. It hands the hard origin steps to the factory. It gives you control of freight, where the real savings often sit.
Get FOB quotes from every supplier on your shortlist. Now you are comparing like for like. Then add your freight, insurance, duties and local delivery on top to reach your true landed cost.
Price your product from that landed number. Never from the FOB figure alone.
A quick gut check before you agree
Run these four questions before you accept any quote.
Which Incoterm is this? If it is not written, ask. Do not assume.
What is included up to that point? Get it in writing.
What do I pay after the handover? Freight, duties, insurance and delivery all live here.
Is every quote on the same term? If not, you cannot compare them yet.
Four questions. A few minutes. They protect your margin far more than haggling over unit price.
The takeaway
Incoterms are not complicated. They are just unfamiliar.
Once you know the handover point, a quote stops being a mystery. You can compare suppliers honestly. You can build your landed cost properly. You can price with confidence instead of hope.
We have managed production across China, India and beyond for more than 25 years, with on-ground teams in both countries. The same lesson holds every time. Founders who understand their shipping terms keep more of their margin.
If you want a second set of eyes on a supplier quote, or help working out your real landed cost before you commit, book a sourcing call. We will tell you honestly whether the numbers stack up.
Frequently asked questions
What are Incoterms and why do they matter for product founders?
Incoterms are internationally recognised shipping terms that define where the factory's responsibility ends and yours begins. They determine who pays freight, who handles customs clearance and who carries the risk if goods are lost or damaged. Getting them wrong means your actual cost per unit is higher than your quote suggested.
What does FOB mean and why is it recommended for early orders?
FOB (Free On Board) means the factory is responsible for getting your goods onto the ship at the origin port. From that point on, freight, insurance and import customs are your responsibility. It is widely recommended for first orders because it is easy to compare between suppliers, hands the complex origin-country logistics to the factory and gives you control over the freight leg, where meaningful savings are often found.
What is the main downside of an EXW quote?
EXW (Ex Works) means the factory's job ends at their factory door. You pay for local collection, export clearance, freight, insurance and import customs. That can add hundreds of dollars to the real cost, and it requires a freight forwarder who can legally collect from an overseas factory on your behalf. For a first order, EXW often looks cheaper than it is.
When does DDP make sense for a product founder?
DDP (Delivered Duty Paid) can be convenient for very small first orders or test shipments where simplicity matters more than margin optimisation. The risk is lack of visibility: you cannot see what the factory paid for freight or how they declared your goods at customs. Ask for an itemised breakdown before agreeing to DDP on any significant order.
How do I build my landed cost from an FOB quote?
Start with the FOB unit price and add international freight, cargo insurance, import duties and taxes, customs brokerage fees and local delivery to your warehouse or fulfilment centre. Divide the total additional cost by your unit count and add it to the FOB price. That final number is your true landed cost and the figure your margin calculation should start from.
Kristy Withers
Founder of Source Haus. 20+ years in product sourcing and manufacturing across China, India and Southeast Asia.
