COGS: Cost of Goods Sold

It is the cost directly associated to producing and selling your product/service. This includes the cost of the materials dorectly used to create the product. It excludes indirect expenses, such as distribution costs and sales force costs.

The COGS are very important for any company or startup since it tells you how efficient you are in managing labor and supplies in the production process. The COGS are also used to calculate the gross profit = revenue - COGS

Definition

Depending on your business model, your COGS could be very different and mean different things.

SaaS, App, Agency, Courses, Marketplace

The product with these business models is either software or a service made by people. In both cases, there isn't really a cost associated to the production of the product for each particular customer. This is usually the case with software companies.

In this case the COGS won't be a big expense for your startup, but you should add them either way. Here are some ideas of COGS that you could have:

  • Application hosting and monitoring
  • Data communication expense
  • Software license fees for products embedded in the application
  • Fees

E-commerce

For this business model you actually have a physical product to produce (or buy), sell and ship so your COGS will be significantly higher. For an e-commerce company the COGS will be:

  • Product cost: either producing or buying the product that you are then selling
  • Packaging cost
  • Fulfilment cost
  • Fees

How to estimate

Depending on your business model, estimating COGS is pretty different:

  • Software - Services

    If you aren't a technical founder or you have a third party build your product, talk with them and come up with reasonable expectations for the COGS of your product.

  • Physical - E-Commerce

    If you are the one producing the goods then you should know how much they cost, then just add packaging and shipping. If you buy them from a third-party talk to them to get a realistic estimate of the cost for the amount of the products that you are going to buy (remember to include packaging and fulfilment).

Don't worry about forgetting something (especially for physical products), Sturppy will guide you and help you fill all the necessary items.