Most ecommerce operators care about COGS. You track inventory. You try to watch margins. You want accurate numbers.
But here’s what we see constantly: Product costs are FREQUENTLY wrong. Not a little off. Often significantly off.
And it’s not because you’re careless. It’s because maintaining accurate product costs is harder than anyone realizes. Especially when you’re running a business at the same time.
Here’s the real problem: Wrong costs lead to wrong margins. Wrong margins lead to wrong decisions. And wrong decisions cost real money.
In this guide:
- Why your margins don’t make sense
- The 5 reasons your costs are wrong
- What wrong costs actually cost you
- How to diagnose the problem
- What usually fixes this
- Your next step
Key Takeaways
- Your product costs are probably wrong. Most sellers use outdated costs or buy costs instead of landed costs, creating margin errors of 20-35 percentage points.
- Wrong costs create unpredictable margins. If your gross margin swings 5+ points month to month without a clear reason, your cost tracking is broken.
- The main culprits: Outdated costs in your system, using buy cost instead of landed cost, no clear process for updating costs, operational gaps, and communication breakdowns between finance and operations.
- The 10% rule: If your year-end inventory adjustment exceeds 10% of total inventory value, you need systematic fixes.
- Most fixes require: Assigning cost catalog ownership, calculating true landed costs, implementing an inventory management system, and documenting every inventory movement.
The Pain: When Your Margins Don’t Make Sense
You look at your P&L and something feels off.
January shows 35% margin. February jumps to 42%. March drops to 29%. You didn’t change pricing. You didn’t run a huge promotion. So, what happened?
Or maybe it’s the opposite. Your margins look consistent from month to month. Then you do a physical inventory count at year-end and discover you need a massive adjustment that tanks your profitability.
This isn’t about sophistication. We see this with $40M brands just as often as $1M brands. The pattern is the same.
You’re tracking inventory. You’re moving costs to COGS. But the unit costs you’re using? They have no basis in reality.
And when your costs are wrong, everything downstream is wrong. Margins. Pricing decisions. Product mix. Channel profitability. All of it.
The 5 Reasons Your Costs Are Wrong
Let’s break down exactly how this happens.
1. Outdated or Incorrect Product Costs
Your supplier raised prices six months ago. The new cost never made it into your system.
You switched manufacturers. Still using the old cost.
Someone accidentally entered a purchase order at $0.00. Your weighted average cost just broke, and nobody noticed.
With lots of SKUs and no clear process for updating costs, they drift fast. A $0.75 error on a product you sell 800 units of per month is a $7,200 annual margin miscalculation.
Multiply across 50+ SKUs, and you can see why margins feel unpredictable.
2. Using Buy Cost Instead of Landed Cost
Most sellers track what the manufacturer charges. Let’s say $8 per unit. That’s what goes in QuickBooks. That’s what margin calculators use.
But the product doesn’t actually cost $8. The true landed cost includes:
- Manufacturer invoice (buy cost): $8.00
- Ocean freight: $3.20
- Duty (12%): $0.96
- Customs/broker fees: $0.75
- Inland transport: $1.40
- 3PL receiving: $0.55
- FBA inbound: $1.25
- FBA storage (monthly avg): $0.95
- Expected shrink (2.5%): $0.44
True landed cost: $17.50
If you’re using $8 as your cost and selling for $28, you think you’re making 71% margin. You’re actually making 37% margin.
Your margin calculations are off by 34 percentage points.
This is why revenue climbs, but cash doesn’t follow. You’re making decisions based on phantom profit.
Learn more about calculating accurate landed costs here → or you can watch the video here →
3. No Clear Process for Cost Management
Here’s what happens without clear SOPs: Multiple people buy inventory. Multiple people receive it. Multiple people enter data. Everyone does it slightly differently.
No one person owns the product cost catalog. Costs get updated sporadically, if at all. There’s no quality control process to catch errors.
If you’re using an inventory management system but not using it correctly, it’s very easy to skew costs quickly. Different costing methods (FIFO, LIFO, weighted average) can produce wildly different results. We have a blog here that explains all three costing methods →
The bigger your catalog, the faster costs drift without a systematic process. Check out our guide on How to Establish Your Inventory Costs for an Accurate Product Cost Catalog and this video on Calculating Ecommerce Inventory and COGS Using Product Cost Catalogs →
4. Operational Gaps That Create Blind Spots
Your system shows 600 units available. But in reality:
- 60 were damaged at receiving (never logged)
- 35 are samples sent to influencers (never logged)
- 25 are returns that can’t be resold (logged as returns, not loss)
Your actual sellable inventory is 480 units. Your availability is 20% optimistic.
This affects reorder timing, stockout risk, and year-end adjustments. If 5% untracked loss happens each month, by year-end you’re doing huge adjustments and wondering what happened.
5. Lack of Communication Between Finance and Operations
This one creates massive swings.
You received inventory you haven’t been billed for yet. The accountant doesn’t know. Your physical count looks way higher than QuickBooks. Looks like a big adjustment is needed.
Or the opposite: You paid for inventory that’s still on a truck. Operations doesn’t communicate it. QuickBooks shows inventory the warehouse doesn’t have. Another big adjustment.
These communication gaps create volatility that has nothing to do with actual performance.
What Wrong Costs Actually Cost You
When you can’t trust your product costs, you can’t trust your margins. And when you can’t trust your margins, every decision becomes a guess.
Pricing decisions feel risky. Can you afford to run a 20% off promotion? You’re not sure. Your margins say one thing this month, something else next month.
Channel expansion stalls. Is Amazon profitable after FBA fees? Should you take on that wholesale account at 50% off retail? You can’t answer confidently because you don’t know your true costs.
Product decisions lack clarity. Which SKUs should you expand? Which should you kill? Without accurate costs by product, you’re guessing.
Growth feels dangerous. You want to scale, but you’re not confident the numbers support it. You’re hesitant to hire, invest in marketing, or order more inventory because the foundation feels shaky.
Year-end adjustments create chaos. Margins looked solid all year. Then you do a physical count and need a big adjustment. Suddenly your profitable year looks different.
This last one is what happened to a client of ours. We’d been telling them for years they needed to do a physical count, but with a huge warehouse and lots of SKUs, it was just easier not to.
But then they decided to sell the business. The buyer was savvy and required a physical count. The count revealed a BIG difference between what the system said they had and what they actually had in the warehouse. This required a massive adjustment in one month, which tanked their profitability for the year, tanking the value of the business.
Added together, you can see that even beyond the numbers, this creates:
- Decision paralysis (every choice feels risky)
- Imposter syndrome (feeling like you’re faking it)
- Team frustration (nobody trusts the reports)
- Missed opportunities (can’t move fast without data)
The real cost isn’t the bad number. It’s the decisions you can’t make confidently because you don’t trust your data.
How to Know If This Is Your Problem
Run three simple checks:
1. Gross Margin Consistency Check
Pull 6 months of P&L. Look at your gross margin percentage month to month.
Margins should stay within 2-3 percentage points unless you changed pricing or ran a promotion. If margins jump 5+ points with no clear reason, your COGS tracking is broken.
2. Product Cost Spot Check
Pull your top 20 SKUs by revenue. Compare the cost in your system to actual invoices from the last 3 months.
If more than 20% of your top SKUs have cost variances over 15%, your entire cost catalog is suspect.
3. Year-End Adjustment Size
If your year-end inventory adjustment exceeds 10% of total inventory value, you have serious operational gaps creating financial blind spots.
Under 10%? Fixable with tighter process. Over 10%? You need a systematic overhaul.
What Usually Fixes This
Most brands need to tackle this in stages:
Step 1: Assign ownership of your product cost catalog
Only one person should own this. Create a clear process for when and how costs get updated. Do monthly spot-checks on your top 20 SKUs and compare actual cost to system cost.
Step 2: Calculate true landed costs
For your top 10-20 products, add up everything: buy cost + freight (all methods) + duties + storage + handling + expected loss. Update your system with these real numbers.
Step 3: Document every inventory movement
No exceptions. Damaged goods, samples, photoshoot inventory, returns, employee perks. If inventory moves, it gets logged. Build workflows that make this automatic, not optional.
Step 4: Get an inventory management system (if you don’t have one)
If you’re managing inventory in spreadsheets, you’ve likely outgrown that approach. An inventory management system (IMS) helps you:
- Track quantities across multiple locations and channels
- Update costs systematically
- Automate inventory movements
- Run reports that show which SKUs are profitable
- Integrate with your accounting software
A good read here is How to Tell If You’re a Good Fit for an Inventory Management Solution.
Good options include Cin7, Finale Inventory, or Katana. The right system depends on your volume, channels, and how complex your operations are. Things like manufacturing, wholesale accounts, EDI requirements, and your accounting software all matter.
Step 5: Implement quality control checks
Even with good systems, costs drift. Set up regular checks:
- Monthly gross margin review (should be stable within 2-3 points)
- Quarterly deep dive on top 20 SKUs
- Annual physical inventory count
These aren’t sexy fixes. But they work.
Your Next Step
Wrong costs aren’t a sign of failure. They’re a sign that maintaining accurate product costs is genuinely hard, especially while running a growing business.
But wrong costs create wrong decisions. And wrong decisions cost real money.
Start with the Inventory Reality Check. This free diagnostic shows you exactly where your COGS tracking is breaking down and what to fix first. And it takes under 3 minutes.
You’ll be able to see:
- Your current state: Where your inventory system stands right now (and why it feels the way it does)
- What’s at risk: The specific gaps creating blind spots in your margins, cash flow, and decision-making
- Your action plan: Exactly what to fix first, with step-by-step guidance you can implement this week
- Personalized recommendations: Whether to handle this yourself or when expert help makes sense for your situation
Need help fixing it? If you’re past the DIY stage, we can help. LedgerGurus specializes in inventory accounting for ecommerce businesses. We can help you:
- Choose and implement the right inventory management system
- Calculate accurate landed costs for your products
- Build processes that keep costs updated automatically
- Connect your operations team with your finance team
- Get margins you can actually trust
We bridge the gap between inventory management software and accounting software so your numbers actually make sense.
Learn more about our Inventory Services →
