How to Calculate Your COGS: A Simple Guide for Brands

If you’re a brand owner or marketer, you’ve probably heard the term “COGS” tossed around. It stands for Cost of Goods Sold, and it’s the secret sauce behind understanding how much you really spend on creating your product. Today, we’re breaking down how to calculate your COGS in a simple, fun, and no-jargon way, and how to figure out your net profit. Plus, a quick note: this calculation does not include customer acquisition cost (CAC), so keep that in mind when planning your budget.

Why Knowing Your COGS Is a Game Changer

Imagine you run a small bakery. Every loaf of bread you sell has costs attached to it—flour, yeast, water, and even the electricity used to bake it. All these add up to your COGS. Knowing your COGS helps you understand exactly what it costs you to make one loaf of bread. When you know that, you can set your prices so that you not only cover your costs but also make a profit.

The Simple Formula

At its core, calculating COGS is as simple as adding up all the direct costs that go into making your product. For most brands, this includes:

• The cost of raw materials (like ingredients for your bread)

• Packaging costs (think wrappers, boxes, or bags)

• Manufacturing expenses (the cost to actually produce the item)

• Shipping costs (both from your supplier to your production facility and from you to the customer)

Once you add up all these costs, you’ve got your COGS. Next, subtract this total from your selling price to get your net profit per unit. For example, if your bread sells for $5 and your COGS is $3, then your net profit is $2 per loaf.

Keep It Simple and Straightforward

Many new and growing brands get bogged down by complicated financial terms and formulas. But understanding your COGS doesn’t need to be a headache. Think of it like making your favorite recipe: you simply measure out each ingredient, mix them together, and then taste to see if it’s just right. In the same way, you mix together all the costs, see what you’re spending, and then figure out your profit.

Remember: This Isn’t the Whole Story

While calculating your COGS gives you a clear picture of the cost to produce your product, it doesn’t account for every expense. One big thing it leaves out is the customer acquisition cost (CAC)—the money you spend on marketing and advertising to get a customer to buy your product. That’s a separate calculation that needs its own focus. So, while your COGS helps you understand the direct cost of production, be sure to consider your CAC when looking at overall profitability.

Why This Matters for Your Business

When you know your COGS and net profit per unit, you’re in a better position to:

• Set the right price: Ensure that your selling price not only covers your costs but also leaves room for profit.

• Control expenses: Identify where you might be overspending on production, packaging, or shipping.

• Plan for growth: Make smart decisions about scaling your business, knowing exactly how much profit you’re making on each item.

This straightforward approach empowers you to make informed choices. You might decide to negotiate better prices with suppliers, change your packaging, or streamline your production process. Every little tweak can lead to higher net profit and a healthier bottom line.

A Fresh Take on Business Basics

At the end of the day, calculating your COGS and net profit doesn’t have to be complex. It’s about knowing what goes into your product and ensuring that every sale makes sense financially. By keeping your approach simple and focusing on what matters, you’re better equipped to run a successful, profitable business. Remember, while this guide helps you understand the cost basics, you’ll need to tackle other expenses like CAC separately to get the full picture of your overall profit.

So, take a moment, crunch those numbers, and see how a clear view of your COGS can lead to smarter pricing, stronger margins, and a thriving business. Happy calculating!