COGS – Cost of Goods Sold
The direct cost of producing or acquiring products sold. Includes: product + import shipping + customs + packaging.
In practice
Every $1 shaved off COGS is an extra $1 in gross margin. Renegotiate with suppliers every 6 months.
Common misconception
'COGS equals the purchase price from the supplier.' Not true. COGS = price + shipping + customs + broker + packaging + delivery to the warehouse. Usually 20-35% higher.
How to fix it
High COGS? (1) calculate true COGS, (2) negotiate with suppliers for Category A items, (3) is a local supplier cheaper on the full supply chain? (4) alternative packaging materials.
Example
A children's clothing store: calculated COGS at $12.50/unit. Recalculating: $12.50 + $2.20 shipping + $1.10 customs + $0.85 packaging = $16.65. A 40% margin turned into 26%.
Priority
Calculate true COGS quarterly, including all hidden costs.
Related terms
Keep learning. Metrics that touch the same area:
- Gross MarginFinance(Sale price - COGS) / sale price × 100. The basis for every pricing and advertising decision.
- Lead TimeOperationsThe time from ordering with a supplier to receiving inventory. Critical for calculating the reorder point.
- ROI – Return on InvestmentFinanceA general profitability metric: (net profit / investment cost) × 100. Different from ROAS — it includes all expenses.
- AOV – Average Order ValueFinanceTotal revenue divided by number of orders. The biggest lever for increasing revenue without more advertising.
- LTV / CLV – Customer Lifetime ValueFinanceTotal expected profit from a customer over the entire relationship. A healthy LTV:CAC ratio is 3:1.
- Cash FlowFinanceThe movement of cash in the business. 'Profitable on paper, broke in the bank' — a common problem in growing stores.
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