October 31, 2019

Metric Deep Dive: Cost of Goods Sold

Updated: 5/5/2022

What is Cost of Goods Sold (COGS)?

It’s how much money is spent on the delivery of your product or service.

To calculate COGS, add up all expenses that go into the production of your product or service, not including operating expenses.

Items to include:

  • App hosting and monitoring fees
  • Customer support
  • Account Management / Customer Success (CS) costs
  • Third-party software license fees
  • Web development and support costs
  • Professional services costs
  • Training/onboarding costs
  • Credit card processing fees

Why is COGS important:

As with most metrics, COGS doesn’t tell you much about your business on its own. However, you will use it to calculate your gross profit. You’ll use your gross profit to calculate your gross margin so it’s critical that your expenses are placed in the correct category and that COGS is accurate.

The Great Debate:

Some argue for customer success costs being under sales and marketing in operating expenses (OpEx). We view customer success as being retention focused which would be included in COGS. Unless your CS team is almost exclusively focused on up-selling, we default to including it COGS but there are exceptions.

Keep in mind:

If your company has subscription and services revenue, make sure to track the COGS for each of those revenue streams separately - VCs and investors may want to know your gross margin on your software business separate from your services work.

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