Three letters that control your money

Every international purchase order has a three-letter code on it somewhere. EXW, FOB, CIF, DDP — they look like jargon, and honestly, most people gloss over them. But those letters determine who's responsible for what at every stage of the journey from factory to warehouse. They determine who pays, who takes the risk, and who's on the hook when something goes wrong.

If you've ever been surprised by a cost you didn't expect — "wait, I have to pay for trucking from the factory to the port?" — odds are you misunderstood your Incoterm.

The four you'll actually encounter

There are 11 official Incoterms (2020 edition), but realistically, you'll deal with four.

EXW (Ex Works)

This means: the supplier puts the goods outside their door. That's it. Everything else — pickup, export clearance, freight, insurance, import clearance, delivery — is on you.

Maximum control, maximum hassle. Good for experienced importers who have a freight forwarder they trust and want to manage the whole chain. Bad for anyone who doesn't have boots on the ground to handle export paperwork in the supplier's country.

FOB (Free on Board)

The supplier gets the goods to the port and handles export clearance. From the ship onwards, it's your responsibility.

This is the sweet spot for most importers. The supplier deals with their domestic logistics (which they know better than you), and you control the main carriage. You pick the shipping line, you negotiate the rate, you choose the route.

CIF (Cost, Insurance and Freight)

The supplier arranges and pays for freight and insurance to your destination port. You take over from there — customs, duty, delivery.

Sounds convenient, right? And it is, for your first shipment or two. The catch is that the supplier picks the cheapest carrier and the most basic insurance coverage, and their costs are baked into your unit price. You can't see what you're paying for freight, so you can't negotiate it, shop around, or improve it.

DDP (Delivered Duty Paid)

The supplier handles absolutely everything — freight, insurance, customs, duty, delivery. The price they quote is the price you pay, door to door.

Sounds perfect. The reality is you're completely dependent on someone who may or may not know how customs works in your country. If they miscalculate duty, guess who ends up paying the difference? (Spoiler: you.)

Good for samples and test orders. Risky for ongoing supply.

The CIF trap (and why FOB is usually better)

This is worth digging into because it's where a lot of new importers get burned.

Supplier A quotes $2.50/unit FOB. You arrange freight yourself: $0.40/unit. Total: $2.90.

Supplier B quotes $3.10/unit CIF. "Shipping included." Sounds similar.

But here's what you don't see with Supplier B:

• They booked the slowest carrier to save money
• Insurance is the bare minimum (110% of invoice value, weakest coverage)
• You can't change the freight forwarder or negotiate the rate
• If freight rates drop next quarter, you don't benefit — the supplier pockets the difference

With FOB, you control the freight. You can switch carriers, negotiate volume discounts, choose faster routes when you need them, and you know exactly what you're paying for each piece.

How to actually compare quotes on different terms

This is crucial. You can't compare a CIF quote to a FOB quote directly — they include different things. To compare suppliers fairly, you need to normalise everything to the same basis.

Either strip everything back to FOB (remove the freight and insurance from the CIF quote) or build everything up to full landed cost (add the remaining costs to each quote). Only then are you comparing like with like.

I've seen people choose Supplier B because their CIF quote was $0.20 cheaper than Supplier A's FOB quote plus freight. The difference? Supplier B was using a carrier with a 14-day longer transit time and no tracking. That $0.20 "saving" cost them a week of stockout and $3,000 in lost sales.

Practical advice

Default to FOB for regular shipments. Best balance of control and simplicity.

Use EXW when you ship full containers and have a good freight forwarder. Potential savings on inland transport in the supplier's country.

Avoid CIF for anything ongoing. Fine for a first test order. Expensive and opaque for repeat business.

Always specify the named place. "FOB Shenzhen" and "FOB Shanghai" are very different things — one includes hundreds of kilometres of inland trucking, the other doesn't. Be specific.

Put it in writing early. Agree the Incoterm before you finalise pricing. It's awkward to renegotiate terms after you've agreed on a unit price.