Definition
COGS are the direct costs required to deliver your product or service, including infrastructure, vendors, and usage-driven support.
Why it matters
COGS determines gross margin, which sets pricing floors and limits discounting without eroding profitability.
Pricing implications
Pricing should cover COGS at expected usage plus a margin buffer for high-usage cohorts.
Common components
Infrastructure, third-party APIs, storage, bandwidth, support time, and payment processing fees.
Measurement tips
Use blended rates, separate fixed and variable costs, and track COGS by product line and segment.
Checklist
- Define which costs are included in COGS.
- Separate fixed vs variable components.
- Track COGS per unit of usage.
- Review vendor contracts and rate changes.
- Model p90 usage and cost spikes.
- Align pricing tiers with cost tiers.
- Audit support time costs quarterly.
- Keep assumptions documented.