COGS calculator: cost of goods sold, margin and markup

What cost of goods sold actually means

Cost of goods sold is the direct cost of the products you sold in a period. It is the money that left your business to make or buy stock, and nothing else. Advertising, rent, software, salaries and outbound shipping are all real costs, but they are costs of running and selling, not costs of goods, so they sit below the gross profit line.

There are two ways to calculate it, and you need both for different jobs.

Period COGS, for your accounts

This is the version your accountant and your profit and loss statement use. It answers the question of what the stock you actually sold this quarter cost you, and it self-corrects for stock you bought but have not shifted yet.

Unit COGS, for pricing and ad buying

This is the landed cost of one item on your shelf. It is the version you need when you are setting a price, working out whether a discount still makes money, or deciding what you can afford to pay for a customer. Most brands underestimate it because they remember the supplier invoice and forget the freight.

Worked example: how the numbers fit together

Every figure below is invented for the sake of the example. These are round numbers chosen to make the arithmetic easy to follow. They are not Hey Sage client data, they are not an industry benchmark, and they are not a target you should aim at. Put your own numbers into the calculator above.

Step one: unit COGS and gross margin

Gross margin is 72 dollars divided by the 100 dollar price. Markup is the same 72 dollars divided by the 28 dollar cost, which is why it looks so much bigger. Same product, same profit, two very different percentages.

Step two: what is left after the cost of selling

Gross margin said 72 per cent. The number that actually governs your ad budget is 59.2 per cent, and it produces a break-even ROAS of 1.69. That gap between the two is where a lot of paid media goes quietly wrong.

There is one more step before that 1.69 goes anywhere near an ad account. It is measured on GST exclusive revenue, and if you are registered for GST the purchase value Meta and Google report back to you is what the customer paid, GST included. Multiply by 1.1 and the figure to compare against platform-reported ROAS is 1.86.

Step three: the period version, for your accounts

Notice that the period margin, 60.2 per cent, comes out below the 72 per cent the single product suggested. In a real business that gap is normal and it is informative: discounts, freight that came in above quote, damaged stock, and a sales mix weighted towards your lower margin lines all live in the difference. If your period margin is a long way under your product margin, the period number is the one telling the truth.

What to include and exclude in COGS for an ecommerce brand

The test is simple. If the cost exists because that unit exists, it is COGS. If the cost exists because you are running a business and trying to sell things, it is not.

Two habits are worth building. First, use landed cost, not the invoice price, because freight and duty are where margin quietly disappears. Second, keep fulfilment out of COGS but never out of your thinking: it does not change your gross margin, and it absolutely changes what you can pay for a customer.

Margin and markup are not the same number

This one costs brands real money, because the two are easy to mix up in the direction that flatters you.

Margin is measured against the price. Markup is measured against the cost. Using the illustrative product above, a 28 dollar cost sold at 100 dollars is a 72 per cent margin and a 257 per cent markup.

Run it the other way and the trap becomes obvious. Apply a 50 per cent markup to that 28 dollar cost and you get a 42 dollar price, which is only a 33 per cent margin. If you had assumed 50 per cent markup meant 50 per cent margin, you have just priced a product with 17 points less room than you thought, and every ad budget you build on top of it is wrong.

The calculator above shows both figures side by side for exactly this reason.

How COGS drives your break-even ROAS

If you buy paid traffic, COGS is not an accounting chore. It is the input that sets the floor on every campaign you run.

Break-even ROAS is the return on ad spend at which a campaign has paid for the product, the shipping, the fees and the media, and returned exactly nothing. Below it you are buying revenue at a loss. Above it you are making money on the first order.

In the illustrative example, a 59.2 per cent contribution margin gives a break-even ROAS of 1.69. Take five points off that margin, say because freight rose or you ran a bigger discount than planned, and the ROAS you need climbs. Nothing changed in your ad account, but the bar moved.

Three things follow from this, and they are the reason we ask every brand for their COGS before we touch a budget.

• A wrong COGS number does not look like a wrong COGS number. It looks like a channel that will not scale, or an agency that cannot hit target. If your break-even is really 2.4 and you have been told it is 1.8, the campaigns were never going to work.
• Break-even ROAS is a first-order number. If customers come back, you can afford to acquire below first-order break-even, but only if you know your repeat rate rather than hoping for one. Model that on the Shopify ecommerce profit calculator, which extends this same maths into LTV, MER and a 12 month forecast.
• Discounts are margin decisions, not marketing decisions. A 20 per cent off code on a 59 per cent contribution margin does not cost you 20 per cent of profit. It costs you a third of your contribution, and it lifts the ROAS you need at exactly the moment you are trying to sell more.

Keep your COGS current. Supplier prices move, freight moves, and a landed cost you calculated eighteen months ago is a number you are now guessing at.

How to use the COGS calculator

1. Choose per unit or per period. Use per unit when you are pricing a product or setting an ad target. Use per period when you are reconciling to your profit and loss.
2. Enter your landed cost, not your invoice price. Supplier cost, inbound freight, duties and product packaging. If freight is billed per shipment, divide it across the units in that shipment.
3. Add your selling price excluding GST. If you sell at 110 dollars including GST and you are registered, that is 100 dollars ex GST. The calculator will show you gross profit, gross margin and markup from there.
4. Add your other variable costs. Outbound shipping, payment fees and pick and pack. These are not COGS, but they are what stands between gross margin and the money you can actually spend on ads.
5. Read the break-even ROAS, then match it to the way your platform reports. The formula gives you break-even on GST exclusive revenue. If you are registered for GST, multiply it by 1.1 before you set anything in Meta or Google, because those platforms report the GST inclusive value the customer paid. That GST inclusive figure is the number to take into your ad account, and any target you set should sit above it with enough headroom to cover your overheads.

Nothing you type is stored or sent anywhere. The tool runs in your browser.

Where to go next

Once you know your COGS, the next questions are what to charge, what to spend and how to tell whether it worked. These are all free, and they all use the same maths.

• Shopify ecommerce profit calculator: the full model. Takes your COGS as an input and adds Shopify fees, GST treatment, returns, repeat purchase rate, MER, LTV to CAC and a 12 month profit forecast.
• AOV and CVR scenario planner: what happens to the same store if you lift average order value or conversion rate instead of cutting cost.
• Paid media budget planner: turn a revenue target and a break-even ROAS into a monthly budget you can actually defend.
• All Hey Sage free tools: the full set of calculators, planners and diagnostics.

And two guides that pick up where the numbers stop:

• The Safe Scaling Playbook: how to add budget without pushing your blended return below the break-even you just calculated.
• The Paid Media Measurement Stack: how to measure the return you are getting well enough to trust it against these numbers.

If you would rather have people who work from your real margins run your Meta and Google ads, get started.

COGS calculator FAQ