COGS (Cost of Goods Sold)
The direct costs of producing and delivering whatever you sell. Excludes overhead, marketing, and salaries unrelated to delivery.
COGS is the variable cost directly tied to producing each unit of revenue. For an e-commerce business, COGS includes the wholesale cost of the product, packaging, and shipping. For a SaaS business, COGS includes hosting (AWS, etc.), payment processing fees, and customer-support headcount that grows with customer count.
The line between COGS and operating expenses (OpEx) trips people up. The clean rule: if the cost rises linearly when you serve more customers, it's COGS. If it stays roughly flat regardless of customers served, it's OpEx.
- COGS examples (SaaS): AWS bill, Stripe fees, Twilio fees for SMS, customer-support team
- OpEx examples: engineering salaries, marketing spend, office rent, executive comp
Revenue − COGS = gross profit. Gross profit / Revenue = gross margin.
For SaaS founders, the most common mistake is putting all engineering salaries into COGS. Most of engineering is OpEx (it doesn't scale linearly with customer count). Only the slice directly running infrastructure or customer support belongs in COGS.
Getting COGS right matters because it determines reported gross margin — which determines how investors classify your business.
See also
- Gross margin — Revenue minus the direct cost of delivering that revenue, divided by revenue. The percentage of each dollar of revenue you keep before operating expenses.
- Unit economics — The revenue and costs associated with one customer (or one transaction). The fundamental health check for whether scaling makes the business better or worse.
- Burn rate — How much cash a startup spends each month above what it earns. Net burn = expenses − revenue.
Ask Cashowa about cogs (cost of goods sold)
Apply this concept to your actual numbers — with verifiable math.