COGS (Cost of Goods Sold)

Cost of Goods Sold (COGS) represents the direct costs attributable to producing or acquiring goods sold during a specific period. Calculated as: Beginning Inventory + Purchases/Production Costs - Ending Inventory.

COGS is a critical component of the Profit and Loss Statement, directly impacting Top Line Revenue to determine Gross Profit and is essential for EBITDA and Bottom Line calculations.

For SaaS Businesses

COGS typically represents 10-30% of revenue and includes:

• Third-party software licenses and APIs directly used for service delivery
• Cloud hosting and infrastructure costs (AWS, Google Cloud)
• Payment processing fees
• Customer support staff directly serving paying customers
• Data storage and bandwidth costs

For Ecom Businesses

COGS typically represents 50-70% of revenue and includes:

• Product purchase costs or manufacturing expenses
• Shipping and fulfillment costs
• Payment processing fees
• Packaging materials
• Import duties and freight
• Warehouse labor directly handling inventory

What's Included vs Excluded

Included in COGS:

• Raw materials and components
• Direct labor (production workers, fulfillment staff)
• Manufacturing overhead (factory rent, equipment depreciation)
• Third-party services directly tied to product delivery
• Inventory acquisition costs

Excluded from COGS:

• Sales and marketing expenses
• Administrative and general expenses
• Research and development
• Executive salaries
• Office rent and utilities
• Customer acquisition activities

Understanding COGS alongside Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV) ensures sustainable unit economics and optimal pricing strategies.