Cost of Goods Sold (COGS) is the most critical component of your financial model, and it can wreak havoc if you get it wrong.
In the early days, many CPG founders treat COGS as more of a guess than a grounded number, just a quick back-of-the-envelope calculation. As a business grows and operations become more complex, however, the true cost of producing and delivering product becomes much harder to pin down, and far more important to understand.
At nDepth, we work with CPG brands at every stage of growth. And in our experience, COGS is one of the most commonly misunderstood areas of financial management. Inaccurate or outdated COGS data doesn’t just lead to messy books. It can distort your pricing strategy, conceal underperforming products and keep you from achieving the margins necessary to grow your brand sustainably.
Here’s what every CPG founder should know about calculating, tracking and optimizing COGS—and how you can build a more profitable business.
Underestimating the complexity of COGS happens a lot with early-stage CPG founders. It’s easy enough to list out your direct ingredients and packaging costs. But as soon as your product moves beyond the kitchen or the prototype phase and into wider production and distribution, other costs come into play. Those costs are just as real, even if they’re harder to pin down.
In the absence of inventory management software (IMS), many founders rely on spreadsheets and periodic inventory methods. While this may suffice in the earliest days of your business, it becomes increasingly difficult to maintain accuracy as your sales channels expand and your product mix evolves. Without clear visibility into your actual costs—at both the unit level and across your entire SKU portfolio—it becomes nearly impossible to evaluate gross margins with any degree of confidence.
Founders often lack two key components:
Without these foundational tools, many brand leaders end up flying blind. And when you can’t see where your margins are coming from—or going—it’s much harder to steer the business in the right direction.
Beyond the obvious expenses—raw materials, packaging and co-manufacturing—there are a host of other costs that can significantly impact your bottom line. We encourage founders to think of COGS in three categories:
Failing to track these categories appropriately can cause serious misalignment between your pricing strategy and your actual cost structure. And when you don’t fully understand your costs, you may be leaving revenue unaccounted for without even realizing it—a particularly tenuous position for early-stage brands that are already operating on tighter margins.
Your approach to COGS should evolve as your business matures. In the early stages, your primary goal is to gain visibility in the market and build a product that resonates with consumers. But while early-stage brands may be willing to take a short-term hit on margins, they still need to ensure their products are designed to be profitable at scale.
Let’s say your first production run costs $5 per unit because you’re only manufacturing 100 units at a time. That might be acceptable if you’ve modeled your unit economics and determined that, at 10,000 units, your cost per unit drops significantly and achieves a healthy 40%+ gross margin after trade spend. The key is knowing what your future margins should look like and making decisions that set you up to reach them.
For growth-stage brands, the conversation shifts. Once you’ve gained traction and your volume increases, you need more sophisticated systems and processes to support your business. That means revisiting your cost models frequently, updating assumptions as real-world costs change, and investing in inventory management and procurement systems that give you accurate, real-time data.
It also means recognizing when your current SKU mix is no longer serving your business. As you grow, it’s essential to identify which products are driving profitability and which are holding you back.
Managing COGS effectively over time requires the right tools. We typically recommend a combination of:
These tools don’t just improve your books. They empower you to act quickly, cut waste and focus your resources on what’s working.
One of our clients, a rapidly scaling CPG brand, recently undertook a comprehensive cost modeling initiative. By building an SKU-level model that accounted for direct and indirect costs, the brand leaders were able to identify several products that consistently underperformed from a margin perspective. This led to an SKU rationalization initiative where they phased out low-margin items and shifted focus to their most profitable products.
We helped the client implement an IMS, which allowed them to track actual vs. projected costs in real time. When the price of a key raw material rose unexpectedly, the team was able to identify the variance quickly and renegotiate supplier terms to bring costs back in line with their targets. As a result, the company not only improved its overall gross margin but also gained the confidence to scale more aggressively, knowing they had a system in place to protect profitability.
At the end of the day, cost of goods sold is about more than accounting. It’s about clarity. It's about control. And it’s about building a foundation for growth that’s rooted in real numbers, not just best guesses.
Understanding and managing COGS at the unit level allows you to price with confidence, manage your product mix strategically and scale your operations without compromising profitability. Whether you’re launching your first SKUs or managing a multiproduct CPG portfolio, the sooner you build that foundation, the better equipped you’ll be to grow your business on your terms.
If you’re ready to get a clearer picture of your true costs, or if you suspect your margins could be better, nDepth can help. Let’s talk about how to build the systems, models and insights you need to manage COGS with confidence.