Calculating Cost Of Goods Sold
Product pricing is tricky for even the most experienced, well informed ecommerce store owners. Various implicit factors such as competitor pricing, customer expectations, perceived value, and product demand are important considerations when it comes to setting price. But one explicit factor, Cost of Goods Sold, or COGS, is critical for selecting retail prices. Your COGS represent a floor. Setting prices below that floor can have negative implications on profitability.
What Is Cost Of Goods Sold?
When an ecommerce store purchases inventory from a third party, Cost of Goods Sold is equal to the expense associated with obtaining that inventory. If your store manufactures goods, COGS refers to the expenses directly associated with producing and selling products, for instance the cost of raw materials and packaging.
Why It’s Important To Calculate COGS
Despite the importance of Cost of Goods Sold for ecommerce stores, many store owners lack visibility needed to make comprehensive decisions using COGS. For instance, Shopify and WooCommerce do not offer Cost of Goods Sold information, while Magento’s out of the box product does not immediately make COGS available.
Accurate COGS data not only helps set the floor for pricing, it helps stores understand how to best market products based on Gross Margin (Gross Margin = Revenue – COGS). In other words, a t-shirt with a $10 Gross Margin could be a good candidate for a scalable email marketing campaign, while a TV with a $200 Gross Margin could be a good candidate for more expensive forms of marketing such as Paid Search. In addition to marketing considerations, stores can use COGS to price products so that margin is available to pay for operating expenses related to maintaining a digital presence. Examples of these operating expenses include web hosting fees, development expenses, or the cost of maintaining an office space.