01 Dec Measuring The True Cost Of Goods Sold (COGS) For Online Retailers
Selling any type of product on line is a competitive business. With just a few clicks, consumers can compare prices from countless websites to make sure they find exactly what they want and at the best price. This puts a lot of pressure on ecommerce retailers to compete on price only. Without proper planning this can be a race to the bottom and it’s not a sustainable way to run your online store.
The answer to this challenge lies in the ability to really understand your costs – and therefore your margins. Knowing your true costs makes it possible to see exactly what products are profitable and which lose money. Most sellers do not pay close enough attention to their costs of goods sold (COGS) so doing so can be a big competitive advantage.
In the end your price needs to be more than your COGS – and whatever is left over becomes your profit.
Here are 3 main categories that go into calculating COGS, and the details behind each.
Chances are you buy most of the products you sell (as opposed to making them from scratch). This obviously includes the cost of the items, but likely also includes costs for inbound transportation to you and other handling costs such as co-packing and other packaging.
An expense often overlooked is inventory carrying costs which can include the cost of money you’ve used to purchase the items sitting in storage (which you are also paying for) that have not yet sold.
Fulfillment and Shipping
Once you have your products, more costs are incurred once a sale is actually made. Fulfillment costs for pick and pack, and shipping materials are part of every sale. Next, shipping is another potential cost to finally get your customer order out the door. Many retailers eat some or all shipping costs as a way to appeal to customers.
Beyond the obvious material and fulfillment costs, there are other overhead costs that must be accounted for. Since these costs are often not product specific, many online retailers will come up with a per unit cost that gets applied across the board to all goods sold as an average.
These overhead costs can include expenses like website development and hosting, customer support, and marketing expenses. Accounting and other support services should be included as well.
Don’t get caught in a race to the bottom by competing on price when you don’t even know your costs, it is not a sustainable way to run your online store. Smart retailers makes sure to know their costs of goods sold – precisely, with every product they sell. It’s the best way to maximize your margins with profitable items and avoid losing money on other low margin products.