COGS for Physical Goods

Cost of goods sold (COGS) refers to the direct costs attributed to the production and sale of a product or service. COGS differs from operating expenses (OpEx), like marketing and administrative costs, in that OpEx includes expenditures that are not directly tied to the delivery of the product or service. COGS is an important metric because it is subtracted from total revenue to determine your gross profit.

Defining the COGS for physical products is critical, not only for the calculation of gross revenue, but also for predicting inventory levels, cash flow and more. This section of the model is focused on the variables that influence the landed cost of physical goods.

To calculate the landed cost of each product unit, start by defining your tooling costs across all product tiers. Tooling costs are the expenses associated with the design, development, and fabrication of implements, molds, dyes, and fixtures used in manufacturing. Whether you manufacture each item yourself or outsource to a factory overseas, you are likely to incur an annual re-tooling expense as you iterate on the design and specifications of your product.

Set Tooling Costs

Set the Molds / Tooling Costs per year for the next five years. The next row allows you to either set the month in the year (1 through 12) when you incur the tooling expense. If you want to spread this cost across all 12 months of the year, enter zero in this row.

The next section breaks down COGS for each tier you offer. For each product tier enter the landed cost in years 1 through 5. The landed cost in this model is the total cost of each unit after it has been shipped to directly to a warehouse or fulfillment center or directly to your customers (if using a drop-shipping method). The landed cost should include all associated expenses like shipping, customs, duties, insurance, and other related fees:

Landed cost = unit cost of product + shipping/freight + customs + insurance

If your manufactured goods are shipped to a warehouse before being distributed to customers (i.e via FBA or another operator), do not include those "last-mile" or fulfillment costs in the landed costs. Fulfillment costs are part of your operating costs and are handled in another section.

In the next row, you will see the model references the retail price of each unit and calculates the margin on the retail price and the wholesale price (if applicable). To change the retail price, go back to Pricing: Physical Goods.

Set Manufacturing and Inventory Assumptions

The next several assumptions are critical in defining your manufacturing cadence.

Start by setting your current dollar value of your inventory. This is the landed cost per unit multiplied by the number of units currently in your inventory. If you are starting out and have no inventory, set this number to $0. Next, set the manufacturing lead time in months. For example, enter 2 if it takes the manufacturer 2 months to deliver a batch of products from the date an order is placed to the date it arrives at your warehouse (or to your customers, if using a drop-shipping approach).

Next, set the number of months between manufacturing batches