Cost of goods sold (COGS)

Cost of goods sold, or COGS, is the direct cost a retailer incurs to acquire or produce the products it sells during a given period. It includes the purchase price paid to suppliers plus directly attributable costs like inbound freight, import duties, and packaging tied specifically to the product being sold. It is one of the first figures any finance team checks when assessing the true health of a retail business, because it sits directly upstream of gross profit.

How cost of goods sold works

COGS is calculated by adding beginning inventory value to purchases made during the period, then subtracting ending inventory value. It excludes indirect costs like store rent, marketing, or corporate salaries, which fall under operating expenses instead and sit further down the income statement. COGS is the figure subtracted from revenue to arrive at gross profit, making it the foundation for gross margin, and it needs to be accurate at the SKU level for pricing decisions to be reliable, since a bad COGS number produces a bad margin number every time a price is set. Retailers that track COGS only at the category level often miss individual SKUs quietly slipping below their intended margin.

Retailers that source internationally often see COGS move independently of anything happening at the shelf, driven by currency fluctuations, freight rate spikes, or new tariffs, which is why COGS needs to be tracked continuously rather than set once at the start of a season.

• Purchase price paid to suppliers
• Inbound freight and import duties
• Packaging directly tied to the product
• Excludes rent, marketing, and overhead

Example

A furniture retailer buys 200 dining chairs at $60 each, pays $8 per unit in freight from the supplier's warehouse, and $2 per unit for protective packaging, bringing total COGS per chair to $70. Selling the chairs at $150 each gives a gross profit of $80 per unit and a gross margin of 53.3%. If freight costs rise to $15 per unit without a price adjustment, COGS climbs to $77 per chair and gross margin drops to 48.7%, even though the retail price never changed and no one noticed until the next margin report.

Why it matters for retailers

COGS accuracy directly determines whether a retailer knows its real margin on every sale. Freight rates, supplier price increases, and currency shifts all move COGS, often quietly, and a retailer pricing off stale cost data can be selling below intended margin without realizing it for months at a time. For mid-market retailers with thousands of SKUs, keeping COGS current across the catalog is one of the most common pricing blind spots, and one of the most expensive to leave unaddressed, since the gap only shows up clearly once a quarterly report is finally reviewed.

How Retailgrid helps

Retailgrid's AI workspace keeps cost data connected to pricing so margin recalculates automatically as COGS changes, instead of relying on periodic manual updates. The price optimization software uses current COGS as the base for margin-aware pricing recommendations, and the ROI calculator can show the margin impact of cost changes across a catalog before you adjust prices.