This is an extremely important area to delve into. Why? Both revenue and COGS directly impact your Gross Profit.  And your Gross Profit pays your overhead and is responsible for generating profit in your business. Here are some options to help lower your COGS and increase your profits.

Understand Margin Pricing:

Although margin pricing doesn’t have a direct impact on COGS, it uses COGS to ensure you’re charging your customers the correct price to attain your desired margin, so make sure you’re using “margin pricing” properly.  An example would be if you sell widgets and building each widget costs you $100 in materials plus $75. In labor.  So, your COGS equals $175 per widget.

You decide you want to make 35% profit on each widget you sell.  What’s your calculation?  Don’t multiply your $175. Cost times 1.35.  You must use the inverse to calculate this properly.  To find the inverse, you simply take whatever profit margin you’re targeting and subtract it from one.  One minus .35 equals .65.  So, our new formula for determining our price is to take our $175. COGS and divide it by .65, which equals $269.23.  To verify this, our new price of $269.23 is the revenue each widget will generate.  We now subtract our $175. COGS, and we get our new Gross Profit of $94.23.

We divide $94.23 by $269.23, and we find our Gross Profit percentage is now 35%, just what we were targeting.