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. If the delivery cost structure is unclear, the pricing model can look healthier than it really is.
What belongs in COGS
Common components include infrastructure, third-party APIs, storage, bandwidth, support time, and payment processing fees. The exact boundary matters because pricing decisions are only as strong as the cost assumptions underneath them.
Pricing implications
Pricing should cover COGS at expected usage plus a margin buffer for high-usage cohorts. If a higher tier or add-on changes support or infrastructure cost materially, that change should show up in the packaging and tier structure.
Measurement tips
Use blended rates where appropriate, but keep fixed and variable components separate. Track COGS by product line and segment so the team can see whether margin weakness is broad or concentrated.
Common mistakes
- Treating every indirect cost as COGS.
- Leaving support cost out of a model that clearly scales with accounts.
- Using one blended margin for all products when usage intensity differs materially.
- Forgetting to model p90 usage or vendor spikes.
How to use it with PricingNest tools
Use the Compute Cost Estimator when compute is the main variable cost. Use the Storage Cost Calculator when storage or retrieval costs are significant. If support burden is a major driver, move into Support Cost Allocation.