Cost of Goods Sold (COGS)

What is Cost of Goods Sold (COGS)?

COGS (Cost of Goods Sold) represents the direct costs of delivering your product to customers. For a physical product company, COGS includes raw materials, manufacturing, and shipping. For a SaaS company, COGS includes hosting/cloud infrastructure, payment processing fees, and direct customer support.

COGS is subtracted from revenue to calculate gross profit, which is why it's important to categorize correctly. Including too many costs in COGS deflates your gross margin; including too few inflates it.

The key test for whether a cost is COGS: would this cost go away if you had zero customers? If yes, it's likely COGS. If no (like engineering salaries or office rent), it's an operating expense.

Why it matters

COGS determines your gross margin, which determines the fundamental economics of your business. If COGS is 50% of revenue, you only have 50 cents per dollar to cover everything else — and that's a challenging business to scale.

For SaaS companies, keeping COGS low (meaning high gross margins) is a core advantage. As you scale, COGS should grow slower than revenue because of the inherent leverage in software delivery.

Formula

COGS = Direct costs of delivering the product/service
Gross Profit = Revenue - COGS

Example

How RunwayCal helps

Common mistakes

• 1Including R&D or engineering salaries in COGS (these are operating expenses for software companies)
• 2Not accounting for infrastructure costs that scale with customers (like bandwidth or API calls)
• 3Classifying sales commissions as COGS instead of sales expense