Cost of Goods Sold (COGS) in the Digital World
Originally published as part of, “The Day Before Digital Transformation” by Phil Perkins and Cheryl Smith
Understanding and accounting for the cost of goods sold (COGS) is different with digital.
Today, in overly simplified terms, the primary economic goal of selling a physical product or service is to make sure that the total cash you are receiving for delivery of your product or service is in excess of the total cost to produce, deliver, and possibly maintain the physical product or service. You pay for the manufacturing or infrastructure capacity, including labor, whether you sell any product or service or not, and the customer will pay the full price of the product regardless of whether they actually use it or not.
When selling a digital product, the problem is a little different. The need is to make sure to maximize the amount of cash received in excess of the cost to keep the system up and running. The costs of a well-designed digital infrastructure will be more variable than trying to scale up or down a fixed physical manufacturing capability. They will scale up and down as usage of the system scales up and down.
In addition, many executives do not understand the typical fees charged by the digital ecosystems for mobile and digital partners. Linking your digital solution into an ecosystem of mobile and digital partners can accelerate time to market, but these costs can add up at scale. For example, because of the mobile duopoly enjoyed by Apple iOS and Google Android when this book was written, they take 30% of the revenue of all mobile products. That percentage does not change with volume. If the value of your solution is delivered inside one of their apps, you are going to pay that commission, regardless of how many units you sell.
If the value of your solution is delivered outside one of their apps, you will not need to pay this fee, but you will most likely pay another partner a fee. For example, if you are using an eCommerce and/or payment platform, you will pay a percentage on every transaction and it can vary significantly across partners.