Why cost of goods sold (COGS) matters to a first-time founder
Gross margin, pricing and every unit-economics check start from cost of goods sold. Ignore it, or guess low, and you can set a price that never covers the cost of delivering each sale, so growth only makes the loss bigger. For a physical product it usually means materials and production labour. For software it often includes hosting, payment fees and customer support, but businesses draw that line differently, so write down where yours sits.
Examples of cost of goods sold (COGS)
A candle maker starts the year with $2,000 of wax, jars and wicks in stock, buys $5,000 more and ends with $1,500 left. Cost of goods sold is $2,000 + $5,000 − $1,500 = $5,500, so $12,000 of sales leaves $6,500 of gross profit. For a $240 yearly software subscription, the equivalent might be $60 of hosting, payment fees and support for that account. Rent and office software stay out of both figures.
Common misunderstanding
People throw every cost into the pot, or leave direct costs out so the margin looks perfect. Rent, your salary and the design tool you pay for with zero customers are overheads, not the cost of a single sale. Costs that appear because a sale happened, such as packaging or payment fees, usually belong in cost of goods sold, though conventions vary. Mix the two groups and both gross profit and gross margin become stories.
When to use it
Separate it the moment money starts coming in. If you cannot name it for one customer, you cannot know whether the price works. Guessing “software is free to serve” is how a cheap plan becomes a trap.