UNDERSTANDING COST OF GOODS SOLD (COGS) AND ITS IMPORTANCE IN E-COMMERCE ORDER FULFILLMENT
As an e-commerce business owner, it is important to understand the financial metrics that drive your business. One of the most critical metrics to consider is the cost of goods sold (COGS). COGS is a key measure of profitability that represents the direct costs associated with producing and delivering your products.
In this blog, we will explore what COGS is, why it’s important for your e-commerce business, and how to calculate it. We will also discuss how to use COGS for other important order fulfillment metrics.
At 3P SHIPPING, we understand the importance of COGS for e-commerce businesses and are committed to providing comprehensive fulfillment and shipping solutions that help our clients grow their businesses.
WHAT IS COGS?
COGS is a financial metric that represents the direct costs associated with producing and delivering your products. These costs include the cost of materials, labor, and overhead expenses that are directly related to the production and delivery of your products. COGS is important because it directly impacts your business’s profitability. By understanding and managing your COGS, you can make better decisions about pricing, product development, and marketing.
WHY IS COGS IMPORTANT FOR YOUR E-COMMERCE BUSINESS?
COGS is important for several reasons.
First, it directly impacts your business’s profitability. If your COGS is too high, it can eat into your profits and make it difficult to grow your business. By managing your COGS, you can improve your profitability and reinvest those profits back into your business.
Second, COGS is important for pricing decisions. If your COGS is high, you may need to increase your prices to maintain your profit margin. Conversely, if your COGS is low, you may be able to offer competitive prices and attract more customers.
Finally, COGS is important for product development and marketing decisions.
By understanding the costs associated with producing and delivering your products, you can make informed decisions about which products to develop and how to market them.
HOW TO CALCULATE COGS?
Calculating COGS is relatively straightforward. To calculate COGS, you need to add up the direct costs associated with producing and delivering your products. These costs typically include the following:
Cost of materials: This includes the cost of raw materials and supplies used to produce your products.
Labor costs: This includes the cost of wages, salaries, and benefits for employees involved in the production and delivery of your products.
Overhead expenses: This includes indirect costs associated with producing and delivering your products, such as rent, utilities, and insurance.
To calculate COGS, use the following formula:
COGS = Beginning Inventory + Purchases During the Period – Ending Inventory
Beginning Inventory refers to the total value of inventory at the beginning of the period. Purchases during the period refer to the cost of goods purchased during the same period. Ending inventory refers to the total value of inventory at the end of the period.
USING COGS CONCERNING OTHER FULFILLMENT METRICS
Once you have calculated your COGS, it is important to use this metric in conjunction with other important fulfillment metrics to gain a comprehensive understanding of your business’s profitability and efficiency. Here are some of the other key metrics that you should be tracking:
Gross Profit Margin (GPM)
Gross Profit Margin is calculated as follows:
GPM = (Total Sales – COGS) / Total Sales
This metric measures the amount of profit that you make on each sale after accounting for the cost of goods sold. By tracking GPM alongside COGS, you can get a better understanding of how much profit you are making on each sale and how it compares to your costs.
Order Fulfillment Time
Order Fulfillment Time refers to the amount of time it takes to pick, pack, and ship an order once it has been placed. By tracking this metric, you can identify any bottlenecks in your fulfillment process and make improvements to reduce the time it takes to fulfill orders. This, in turn, can help you reduce your labor costs and improve your overall profitability.
Order Accuracy measures the percentage of orders that are fulfilled correctly. By tracking this metric, you can identify any errors in your fulfillment process and take steps to reduce them. This can help you reduce the cost of returns and improve customer satisfaction, which can lead to repeat business and higher profits.
THE BOTTOM LINE
In conclusion, COGS is a critical metric for any e-commerce business looking to improve profitability and efficiency. By understanding what COGS is, why it is important, and how to calculate it, you can gain a better understanding of your business’s profitability and identify areas for improvement.
Additionally, by tracking COGS alongside other important fulfillment metrics like Gross Profit Margin, Order Fulfillment Time, and Order Accuracy, you can gain a comprehensive understanding of your business’s performance and take action to improve it.
If you are looking to outsource your order fulfillment and shipping processes to a reliable and experienced partner, consider 3P SHIPPING. With years of experience helping e-commerce businesses grow and succeed, they can take care of your fulfillment and shipping needs so that you can focus on scaling your business.