COGS (Cost of Goods Sold)

What is COGS?

Cost of Goods Sold (COGS) represents the direct costs of producing and delivering your product or service. For SaaS companies, this typically includes hosting, third-party software, and customer support costs.

COGS is subtracted from revenue to calculate gross profit. It excludes operating expenses like sales, marketing, and R&D, which come out of gross profit.

SaaS COGS Components

Cloud infrastructure (AWS, GCP, Azure). Third-party software and APIs integrated into the product. Customer support and success teams directly serving customers. DevOps and site reliability engineering. Payment processing fees.

Why COGS Matters

COGS directly determines your gross margin, which is a key indicator of business model quality. High COGS means low margins and less money for growth. Optimizing COGS improves profitability without cutting investment.

COGS in Ecommerce

For ecommerce, COGS includes product cost, shipping, packaging, and fulfillment. Margins are much tighter than SaaS, making COGS optimization critical for profitability.

SaaS COGS breakdown:

• Cloud hosting (AWS): $30,000
• Third-party APIs: $12,000
• Customer success team: $45,000
• DevOps/infrastructure team: $25,000

Total COGS = $112,000

If revenue is $500,000:

Gross Profit = $388,000

Gross Margin = 77.6%