Sellers routinely lump customer shipping into COGS and then wonder why their margins look wrong. Stephen Brown draws the line: COGS covers what it takes to get a product to your warehouse, and cost of sales picks up everything after that. He then works through gross margin, the 40% to 75% range most ecommerce businesses land in, and why that number has to cover marketing, software, and payroll.
Inventory & COGS
COGS Explained for Ecommerce Sellers
2 min
Transcript
0:00 What COGS includes
Hi, I'm Stephen with LedgerGurus, and in this video I'm going to explain ecommerce cost of goods sold, or COGS. Imagine you have a product to sell online. COGS is essentially what it costs to get this product ready for sale. This includes the amount you paid to manufacture or buy it, plus any shipping costs to get it to your warehouse or 3PL for fulfillment. And if you're importing, don't forget those customs fees.
Now you might ask, what about the cost of shipping it to my customer, or the packaging? That's where it gets a bit nuanced. While COGS covers the direct cost of your product, the cost of sales includes broader expenses. In simple terms, COGS is about getting the product to the warehouse, and cost of sales expands that to all costs related to getting it into your customer's hands.
0:40 Gross margin and why it matters
Now, let's talk about another concept related to COGS: gross margin. Your gross margin is essentially your sales minus COGS divided by your sales, then multiplied by 100 to get a percentage. It's a quick way to see how much of your sales revenue remains after accounting for the direct cost of the product sold.
For many ecommerce businesses, a good gross margin falls between 40% to 75% or higher. There's a lot of variance in a gross margin based on what you sell. For example, luxury goods might have a very high gross margin, and electronics might have a very low gross margin.
Why is this important? A healthy gross margin allows you to cover your operating expenses like marketing and other costs of sales, software, payroll, and more. Your gross margin should be somewhat fixed over time, and it is a key metric for determining price if you want overall profitability. If you found this video helpful, like it, share it, and don't forget to subscribe to this channel for more insights.