COGS stops when the product is ready to ship. Cost of sales keeps going: the box and bubble wrap, the delivery, the Facebook ads that won the order, and the processor fee on every card swipe. Stephen Brown separates the two, then opens QuickBooks Online to show the carved out cost of sales section and a business where the two together eat almost 68% of revenue.
Profitability
The Difference between Cost of Sales & Cost of Goods Sold (COGS) in Ecommerce
3 min
Transcript
0:00 What cost of sales covers
Hi, I'm Stephen with LedgerGurus, and in this video I'm going to explore ecommerce cost of sales, and the difference between cost of sales and cost of goods sold, or COGS.
You've got your product and it's ready to be shipped to a customer, but the cost related to the sale, that's your cost of sales. While COGS tells us about the direct cost of a product, cost of sales encompasses a broader range of expenditures.
0:23 Packaging, shipping, ads, and fees
Let's break it down. First up, packaging. You got your bubble wrap, you got your boxes, got all the other things that go into getting a product ready to be shipped to the customer. These have material costs.
Now you have shipping and delivery. Whether you offer free shipping or charge your customers, there's a cost associated with getting your product from your warehouse to the customer's doorstep.
And there's more. Cost of sales also includes marketing and advertising. Those Facebook ads or Google campaigns, they play a role in making a sale, and thus they're part of the cost.
Oh, and don't forget those pesky payment processor fees. Every time a customer uses their credit card, whether it's on PayPal, Amazon Pay, Shopify Pay, or any other payment processor, there's a fee involved. These fees might seem small per transaction, but they add up and are an essential part of your cost of sales.
So in a nutshell, cost of sales for ecommerce includes all of your COGS, plus packaging, shipping, delivery, payment processor fees, marketing and advertising, and any other expense directly linked to making a sale.
Understanding your cost of sales is crucial. It helps you set the right pricing strategy, manage expenses, and ultimately determine the true profitability of each sale.
1:30 COGS versus cost of sales
Now let's talk specifically between the cost of goods sold and the cost of sales. Cost of goods sold is the product cost, what it takes to get a product ready for sale. Cost of sales encompasses all costs related to selling to the customer. That's both a product's cost, as well as everything else related to selling to the customer.
1:48 A look inside QuickBooks Online
So let's take a look at cost of goods sold and cost of sales. Here is an example in QuickBooks Online.
You see, I have my income. I have my product COGS, product cost of goods sold, and then I have this section of the expenses that I've carved out as cost of sales. That's things like advertising, fulfillment to the customer, that's my shipping to the customer, my merchant processor fees, other fees that are related to the cost of sales.
Now, if I do some quick math, I'll see that my cost of goods sold and my cost of sales is almost 68% of all of my revenue. Anything that's left over has to be used for general expenses, and then after that is what I get in terms of profit.
So you want to drive down your cost of goods sold. You definitely wanna drive down your cost of sales, because that will help you be more profitable in the long run.
And that's a wrap on cost of sales. If you found this video helpful, like it, share it, and subscribe to our channel for more videos like these.