COGS in e-commerce: the complete guide to calculating your true costs

COGS stands for Cost of Goods Sold — everything you pay to obtain the product you sell: the purchase cost from your supplier, packaging, customs duties if importing, and any customization costs.

COGS is the first deduction from your revenue. It's also often the biggest expense: averaging 25-40% of selling price for a dropshipping merchant, and 15-25% for a brand with its own production.

Many e-commerce merchants underestimate their COGS by forgetting certain items:

Product cost: the price you pay your supplier (on Alibaba, CJ Dropshipping, or your manufacturer).

Supplier shipping: shipping from China or your warehouse to you or directly to the customer.

Packaging: boxes, tissue paper, stickers, inserts. This can represent $1-3 per order.

Customs duties and import taxes: for non-EU orders, expect 20-30% in duties plus import VAT.

Fulfillment cost: if you use a 3PL (third-party logistics), their picking and packing fees.

The formula is simple: add up all the above costs for one unit of product.

Example: you buy a product for $8 on Alibaba. Shipping costs $3/unit. Packaging costs $1.50. Customs duties add $2.30. Your unit COGS = 8 + 3 + 1.50 + 2.30 = $14.80.

If you sell this product for $39.90, your gross margin is 39.90 − 14.80 = $25.10, or 62.9%. That's your margin BEFORE payment fees, platform fees, ads, and VAT.

The higher your COGS, the higher your breakeven ROAS, and the less room you have for advertising. That's why optimizing your COGS is the most powerful lever for scaling.

With a COGS of $14.80 on a $39.90 price, and total fees of ~$10 (payment + Shopify + VAT), your margin before ads is about $15.10. Your breakeven ROAS = 39.90 ÷ 15.10 = 2.64x.

If you negotiate your COGS down to $11 (−$3.80), your margin before ads jumps to $18.90 and your breakeven ROAS drops to 2.11x. That changes everything for your ability to scale.