Definition
COGS (Cost of Goods Sold) refers to the direct costs involved in producing or purchasing the products that a business sells.
Explanation
In dropshipping, COGS represents the total cost paid to the supplier to fulfill an order. Since dropshippers do not manufacture products themselves, COGS mainly includes:
- Product cost charged by the supplier
- Shipping fees (if not charged separately to the customer)
- Handling or fulfillment fees (if applicable)
COGS does not include marketing, advertising, or operational expenses—these are counted separately when calculating overall profit.
Understanding COGS helps dropshippers:
- Set profitable pricing strategies
- Calculate profit margins accurately
- Evaluate supplier costs and product viability
Example
A dropshipping store sells a portable blender:
- Supplier product cost: $15
- Shipping cost: $5
Total COGS: $20
If the selling price is $40, the gross profit before other expenses is $20.
Key Takeaway
COGS in dropshipping represents the direct cost of fulfilling each order, making it a key metric for pricing and profitability analysis.