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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.

Understanding Cost of Goods Sold

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.

Product Pricing Strategies

Understanding Cost of Goods Sold and Profit Margins are integral for product pricing. Given the competitive nature of ecommcerce, it’s important to consider additional pricing strategies that may vary based on your industry and products.

1. Cost-Plus Pricing

Cost-Plus, also known as Keystone Pricing, uses an easy rule of thumb that involves doubling the wholesale price or COGS for each product.

2. Target Return Pricing

This strategy involves determining a price that yields a set rate of return on investment. So, based on a certain number of items you expect to sell, the target return pricing model computes the price based on a projected total profit.

3. Competitive Pricing

Following the competitive pricing method, store owners set prices based on what competitors are charging for similar products. This strategy can narrow the gap between cost and profit but can help increase positive Customer Lifetime Value.

4. Value-Based Pricing

This pricing model takes into account a deep understanding of customer value. It establishes prices largely on perceived value by the customer or how much the majority of your customers are willing to pay for your products.
Tracking COGS may not be the most exciting task for online retailers but doing it right is a critical factor in building a profitable and sustainable business. Ecommerce stores that can master this metric will find it easier to calculate margins, determine ad spend and make future product decisions.

Understanding Cost of Goods Sold

Glew Helps with Cost of Goods Sold

Glew does a lot of the heavy lifting for store owners when it comes to incorporating Cost of Goods Sold into the decision making process. Using our Cost of Goods Sold tool, ecommerce stores can analyze accurate gross margins, net profit and sales margins.

 

Our tool allows users to import COGS data in bulk using a CSV template, and also provides the ability to modify COGS data for individual products.

 

Integrated Cost of Goods Sold data in Glew helps ecommerce stores optimize advertising spend relative to product profitability and move away from a generalized approach to product marketing.

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