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Chapter 4

Pricing strategies and the cost of goods sold

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Small business guides > Your guide to starting a business > Pricing strategies and the cost of goods sold

Pricing strategies and the cost of goods sold

Your prices can influence the number of sales you make and the profit you earn on each transaction. We look at some pricing strategies to help find a balance between the two.

The first rule of price setting

You need to get more money out of a sale than you put into it. Which means you need to know the cost of the goods sold (also known as cost of sales).

What is cost of goods sold (or services sold)?

Cost of goods sold, or COGS, tells you what your business spends to deliver a product or service to your customer. It’s treated differently to general costs like rent or employee wages.

Identifying what COGS is in your business
Look for expenses that:

  • occur only when a service or good is provided

  • go up and down as sales go up and down

COGS formula

You can get a good idea of your COGS by performing this calculation:

Cost of goods sold formula. Supplies + transport + manufacture + storage + distribution to customer.

Some may not apply

Cost of services formula. Cost of sales commissions  + contractors + travel + equipment use.

Some may not apply

Permanent wages and salaries are generally not included in COGS because they stay the same no matter how many sales you make.

Chapter 5: Types of business structure

Learn how business structure affects what you can and can’t do. We break down the pros and cons for different business types from solo owners to companies.

Read chapter 5

This guide is intended as general information only. Always check with a professional for advice.


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