Why COGS is all wrong for your E-commerce store

Last updated: December 13th, 2018.

COGS - E-Commerce vs Traditional Retail

Are you trying to measure the profitability of your online store?

Subtracting your COGS from your sales is not going to be enough to get you the answers you need. That’s because the old way of doing things that traditional brick and mortar retail merchants used, is not going to work online.

Brick & mortar retailers have the luxury of fewer moving parts and therefore easy profit analysis. They are able to set the selling price for a product, know the product’s cost of goods, and then calculate their profitability for each sale with relative certainty.

E-Commerce stores on the other hand face additional challenges when calculating a sale’s profitability – shipping costs, handling fees, & pay per click advertising costs.

It’s critical to have a system to include these costs in your day-to-day profitability in a way that wasn’t necessary for brick and mortar stores.

Shipping costs are highly variable due to factors such as distance, package weight and dimensions, fuel costs, priority, and even how your Fedex rep woke up feeling that morning. (OK, kind of joking about the last one… see our guide to Negotiating with FedEx to see why).

Advertising costs are rising all the time, and it’s complex to know how much of them to attribute to each order. Each person that visits your store has additional per-order advertising costs you need to consider

With all this variability, how on earth do you keep track of advertising & shipping costs with your cost of goods (COGS) calculation?

Our answer is that most e-commerce businesses simply cannot.

To get an accurate picture of how much profit an e-commerce business makes on each sale, they must figure out their cost of each order, which takes an order’s shipping cost & customer acquisition cost into consideration.

Let’s call this Cost of Order.

To calculate Cost of Order, we need three things

  • Te sum of an order’s line item (or product) costs
  • The shipping cost of an order
  • The customer acquisition cost (CAC).

Product costs can be calculated using various COGS methods - we have an article that explains how to calculate them if you want to know all the methods, an easy place to start is just the invoice from your suppliers!

Shipping costs must be retrieved from shipping software such as [ShipStation](http://www.shipstation.com/) or your FedEx/UPS bill.

Ad costs can vary minute by minute and for each customer who comes to your store you might well be paying a different amount.

You need to get all this data together for every single order, so you can know what your profitability is. If you are missing a piece, you can’t so easily know if your pricing is set right, or understand why you are not making as much money at the end of the month as you think you should be.

More bluntly, if you do not have this level of clarity about your line-by-line profitability, you will struggle to succeeed and grow as an e-commerce store. You cannot rely on using only COGS for profitability and subtracting shipping costs & advertising costs out on your profit statements at the end of the month.

Our solution for this is OrderMetrics, currently the only analytics app that combines your real shipping costs, cost of goods, and order revenue to analyze profit on a per order basis. Our software saves merchants hours each month combining the data needed to monitor their store’s profitability.

OrderMetrics integrates directly with your shipping provider and automatically associates each order with it’s shipping cost.

Then, our app combines this data with your product’s cost of goods to calculate your profit on a per-order basis. Our customers have told us that by using our app, they have reduced the amount of time they spend inserting order data into Excel and have gained better visibility about their orders and profitability.

We have heard stories where shops have discovered popular order combinations with unusually high shipping costs, gone back and changed the shipping method for those shipments, and reduced their shipping costs by 15% or more .

Analyzing profitability metrics on a detailed level can be extremely valuable to find pricing discrepancies, excess shipping costs, and how discounts affect profitability. Our analytics app is currently the only software that automatically associates your orders with their real shipping costs and view your profitability on a per-order basis. Our customers have found this is the best way to measure their store’s profitability.

OrderMetrics has a 14-day free trial and takes minutes to get setup. We currently integrate with Facebook Ads, Google Adwords, ShipStation, Shippo, Shipwire, and many more.

For stores using other shipping services or 3PL warehouses, we provide an easy-to-use interface to upload your shipping costs. 

Want to find even more ways to improve your bottom line?

Order Metrics

OrderMetrics - E-Commerce Profit Dashboard

Check out Order Metrics - A profit management tool for growing ecommerce merchants. The best way to track and measure your e-commerce store performance across multiple storefronts , advertising providers and shipping providers. Customers report increasing their margin by 5-6 percentage points after using Order Metrics.

Try Order Metrics for Free