Cost of Goods Sold (COGS)
The direct cost of producing what a business sells. What counts, what doesn't, real COGS benchmarks by category, and the four levers founders can pull to expand gross margin.
Cost of Goods Sold, or COGS, is the direct cost of producing the products a business sells. For a beauty brand, that means ingredients, manufacturing, primary packaging, and inbound freight. For a fashion brand, it is fabric, factory labor, trims, and shipping into the warehouse. For a service business, COGS is the direct labor and any materials consumed delivering the work.
COGS is the line on the financial model that determines gross margin, which determines whether a business has any room to pay rent, hire a team, run ads, or fund itself out of operating cash. A brand with a 60% gross margin can spend $40 to acquire a $100 customer and still break even. A brand with a 25% gross margin runs out of room before it can run a single Facebook ad. The COGS number is upstream of almost every other decision in the business.
What counts as COGS
The honest version of COGS includes every direct cost required to produce and deliver a unit of product.
What’s in:
- Raw materials and ingredients
- Manufacturing labor (factory workers, line workers)
- Primary packaging (the bottle, jar, tube, box that holds the product)
- Secondary packaging (cartons, polybags, shipping mailers)
- Inbound freight (shipping from factory to warehouse)
- Quality control and testing
- Payment processing fees (variable, sometimes excluded from COGS)
- Returns and defects allowance
What’s not:
- Marketing and advertising
- Office rent and utilities
- Salaries of executives, marketing, customer service, finance
- Software subscriptions used outside production
- Outbound shipping (usually a separate line called fulfillment cost)
The line between COGS and operating expenses matters because investors look at gross margin first. A brand that classifies its warehouse rent as COGS will report a lower gross margin than a competitor that classifies it as overhead, even if the underlying business is identical.
The formula
COGS for a period equals beginning inventory plus purchases during the period minus ending inventory:
COGS = Beginning Inventory + Purchases - Ending Inventory
For most early-stage founders, the per-unit version is more useful:
COGS per unit = Total production cost / Units produced
If a beauty brand produces 10,000 units of a serum at a total cost of $40,000, the per-unit COGS is $4. If the serum retails for $20, the gross margin is 80%, which is excellent. If it retails for $10, the gross margin is 60%, which is fine for retail and tight for DTC at any meaningful scale.
COGS as a % of revenue, by category
These are typical ranges for healthy businesses, based on public investor reporting and category benchmarks. Brands well outside their category’s range usually have either a structural cost problem or an unusual advantage.
| Business type | COGS as % of revenue | Gross margin |
|---|---|---|
| Software / SaaS | 10% to 30% | 70% to 90% |
| Beauty (DTC) | 15% to 30% | 70% to 85% |
| Beauty (mass retail) | 30% to 45% | 55% to 70% |
| Fashion / apparel | 35% to 55% | 45% to 65% |
| Food and beverage | 35% to 55% | 45% to 65% |
| Jewelry | 30% to 55% | 45% to 70% |
| Consumer electronics | 60% to 75% | 25% to 40% |
| Furniture | 45% to 65% | 35% to 55% |
| Grocery and staples | 70% to 80% | 20% to 30% |
Beauty surprises most founders, because mass-retail beauty looks high-margin from the outside even though brands only keep 55-70% of the price after raw materials and a typical 50% retailer markup, with the other 30-45% going to COGS at scale.
How to reduce COGS
Founders who want to expand gross margin have four main places to push.
Volume. Suppliers price every component on a volume curve, and a brand at 10,000 units pays significantly more per unit than the same brand at 100,000. The first jump is often 15-25% as volumes cross a key supplier threshold. Negotiations require commitment and forecast visibility, but the multiplier on margin is real.
Component substitution. A 10% reduction in primary packaging cost or a switch to a more efficient formula can add 3-5 points to gross margin without consumers noticing. Repackaging redesigns are common ways to claw back margin lost to ingredient inflation.
Freight optimization. Inbound freight is often quoted at standard rates that can be renegotiated, consolidated, or routed differently. Brands that audit their freight contracts annually frequently find 10-20% in savings hiding in plain sight.
Country and supplier diversification. A brand that depends on a single country for production carries a tariff and geopolitical risk that became visible to many CPG founders in 2025. Adding a second-source supplier in a lower-cost country, or onshoring critical components, can hedge that risk and sometimes lower cost simultaneously.
Common mistakes
Forgetting payment processing in DTC math. A 3% Shopify processing fee on a $50 order is $1.50, which shows up nowhere in the standard COGS calculation but eats real gross margin. Brands that ignore it report margins that are 2-3 points higher than reality.
Treating inbound freight as overhead. Inbound freight is part of COGS, not part of operations, and the classification affects the gross margin line directly. A brand that classifies it incorrectly will misread its true product economics.
Underestimating returns and defects. Most DTC brands run 5-15% return rates, which means a meaningful share of every batch never produces revenue. The COGS on returned units is sunk unless the products can be resold, and the brands that build a true COGS number factor this in from the start.
Quoting a lower COGS than is real to investors. Investors do their own diligence, and a brand whose stated COGS is 10 points better than its actual COGS loses credibility the moment the data room opens.
Frequently asked questions
What is the difference between COGS and operating expenses?
COGS includes the direct costs of producing the goods sold: materials, manufacturing labor, primary packaging, and inbound freight. Operating expenses include everything else: marketing, rent, executive salaries, software, customer service. The split matters because gross margin (which equals revenue minus COGS) is what investors evaluate first when judging a business.
How is COGS different from gross margin?
COGS is a dollar amount, the total cost to produce what was sold. Gross margin is a percentage, calculated as revenue minus COGS, divided by revenue. A brand with $1M in revenue and $300K in COGS has $700K in gross profit and a 70% gross margin.
Should outbound shipping be in COGS?
Usually no, because outbound shipping (to the customer) is typically a separate line item called fulfillment cost, while inbound shipping (to the warehouse) is part of COGS. The distinction matters because outbound shipping varies dramatically by order, while inbound shipping is part of the cost of acquiring inventory.
What is a good COGS percentage?
It depends on the category, because the right COGS percentage varies widely with what the business is producing. SaaS targets 10-30% of revenue, while DTC beauty targets 15-30%, and apparel and food typically run 35-55%. The right benchmark is the category median, and a brand well above it has a cost problem to fix before expanding.
Sources
- Investopedia, “Cost of Goods Sold (COGS)”. Definition and accounting treatment.
- Harvard Business Review, “What Founders Should Know About Gross Margin”. Gross margin benchmarks across categories.
- BevNET, beverage margin reporting. CPG cost structure data.
- SaaS Capital, gross margin benchmarks. SaaS COGS data.
- Boston Consulting Group, retail industry cost structure. Mass retail margin breakdowns.