COGS (Cost of Goods Sold)
The direct costs attributable to the production of goods or services sold by a company.
Definition
COGS represents the direct costs of producing the goods or services that a company sells. This includes materials, labor, and other expenses directly tied to production but excludes indirect expenses like marketing, sales, and administration.
What's Included in COGS
- Manufacturing: Raw materials, direct labor, factory overhead
- SaaS: Hosting costs, support staff, payment processing
- E-commerce: Product costs, shipping, payment fees
- Services: Direct labor, subcontractor costs
Why It Matters
- Gross Margin Calculation: Essential for determining profitability
- Unit Economics: Critical for LTV calculations
Real-World Example
SaaS Company: $1M revenue with $200K in hosting, support, and payment processing
COGS = $200,000
Gross Profit = $1M - $200K = $800K (80% gross margin)