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Your Shopify Store is Busy. But is it Profitable?

Written by
Tammy Sequeira
Updated on
November 2, 2025

Your Shopify dashboard is exciting. You see the sales notifications. The revenue chart is moving up and to the right. You are constantly packing orders, printing labels, and running to the post office. You are undeniably busy.

But a nagging question keeps you up at night: Are you actually making money?

This is the central anxiety for growing e-commerce owners. Revenue is a vanity metric. Profit is sanity. The problem is that many business owners are setting prices based on what their competitors charge, not on what it truly costs to sell their product. They see money coming in but have no idea how much of it is theirs to keep.

The gap between your revenue and your profit is filled by your costs. The most important cost you must understand is the Cost of Goods Sold (COGS).

Understanding this single metric is the only way to know if your business is truly healthy. It’s the key to setting prices that lead to sustainable growth, not just a busy warehouse.

What is COGS, and Why Does It Matter?

In simple terms, Cost of Goods Sold is the total of all direct costs associated with making and selling a product.

It is not your marketing budget. It is not your Shopify subscription. It is the cost of the inventory you sold during a specific period.

Why is it so important? Because it’s the first and largest expense you subtract from your revenue. It determines your Gross Profit.

Revenue - Cost of Goods Sold = Gross Profit

Your Gross Profit is the money you have left over to pay for everything else. This includes your marketing, software, shipping to customers, and your own salary. If your Gross Profit is not high enough, you can be "successful" all the way to bankruptcy. You might be losing money on every single sale without even knowing it.

The Standard COGS Formula

To find your COGS for a period (like a quarter or a year), you don’t just add up receipts. You need to account for the change in your inventory.

The official accounting formula is:

COGS = Beginning Inventory + Purchases - Ending Inventory

Let's break down what each of those terms means for an online store.

  • Beginning Inventory: This is the total cost of all the inventory you had on hand, ready to sell, at the very beginning of the period. For example, the value of your stock on January 1st.
  • Purchases: This is the total cost of all new inventory you acquired during the period. As we will see, this is more than just the product cost.
  • Ending Inventory: This is the total cost of all the inventory you have left at the end of the period. This is the stock on your shelves on March 31st.

This formula works because it calculates the cost of the inventory that is no longer with you. That inventory is gone for one reason: you sold it.

The Big Mistake: What to Include in E-commerce COGS

This is where most e-commerce owners get confused. The "Purchases" part of the formula is tricky. It's not just what you paid your supplier. It must include every cost to get that product onto your shelf and ready to sell.

It's helpful to think of your costs in two distinct buckets: Cost of Goods Sold (COGS) and Operating Expenses (OpEx).

Include These in Your COGS:

These are your direct product costs.

  • Cost of the product: The amount you paid the manufacturer or supplier for the item itself.
  • Inbound shipping and freight: The cost to get the products from your supplier to you (or your 3PL warehouse). This is a very common omission.
  • Customs and duties: Any tariffs or fees you paid to import the goods.
  • Product packaging: The cost of the branded box, bag, hang-tag, or label that the product itself comes in.
  • Shipping supplies: The boxes, mailers, tape, and labels you use to ship the order. (Note: Many accountants classify this as COGS because a sale cannot be completed without them. It is a direct cost of the sale).
  • Direct labor: If you make your own products, this is the wages of the person physically assembling the item.

All these costs together are your "landed cost." If you buy a product for $10, but it costs $2 in freight and $1 in customs, your true cost for that item is $13. This is the number you should use for your inventory valuation.

Do NOT Include These in COGS (These are Operating Expenses):

These are the costs of running your business, not acquiring your goods. You subtract these from your Gross Profit to find your Net Profit.

  • Platform fees: Your monthly Shopify subscription.
  • Transaction fees: Credit card processing fees (e.g., Shopify Payments, PayPal fees). These are selling expenses, not product costs.
  • Outbound shipping: The postage cost to ship the order to your customer. This is one of the biggest points of confusion. This is a fulfillment expense (an OpEx), not a COGS.
  • Marketing and advertising: Facebook ads, Google Shopping, influencer payments.
  • Software: Your email marketing app, review plugins, or inventory management software.
  • General and administrative: Rent for your office, utilities, or salaries for non-production staff (like a virtual assistant or marketer).

Separating these is the most critical step to understanding your profitability.

A Practical Example: Calculating COGS for a Shopify Store

Let's imagine you sell leather wallets. You want to find your COGS for the first quarter (Q1) of the year.

Step 1: Find Your Beginning Inventory (as of Jan 1)

  • You count your stock. You have 100 wallets on your shelf.
  • You check your supplier invoices. Your total landed cost for each wallet (including the product, freight, and duties) was $20.
  • Beginning Inventory = 100 wallets * $20/wallet = $2,000

Step 2: Calculate Your Purchases (Jan 1 - Mar 31)

  • During Q1, you bought two more batches of wallets.
  • Order 1: 200 wallets at $20 landed cost = $4,000
  • Order 2: 200 wallets at $20 landed cost = $4,000
  • You also bought a bulk order of branded mailer boxes and tape for $500.
  • Total Purchases = $4,000 + $4,000 + $500 = $8,500

Step 3: Find Your Ending Inventory (as of Mar 31)

  • You count your stock again at the end of the quarter.
  • You have 150 wallets left on the shelf.
  • Ending Inventory = 150 wallets * $20/wallet = $3,000

Step 4: Calculate Your COGS

Now, you use the formula.

  • COGS = Beginning Inventory ($2,000) + Purchases ($8,500) - Ending Inventory ($3,000)
  • COGS = $7,500

This $7,500 is the direct cost of all the wallets and shipping supplies you used to generate your sales in Q1.

From COGS to True Profit

Let's continue the example.

Your Shopify dashboard shows $15,000 in total sales for Q1. Now you can find your Gross Profit.

  • Revenue: $15,000
  • COGS: - $7,500
  • Gross Profit: $7,500

This $7,500 is what you have left to run the rest of your business. Now, let's subtract your Operating Expenses for Q1.

  • Shopify Plan: $79/month * 3 = $237
  • Transaction Fees (approx 2.7% of $15k): $405
  • Outbound Shipping (what you paid carriers): $1,800
  • Facebook Ads: $1,500
  • Email Software: $50/month * 3 = $150
  • Total Operating Expenses = $4,092

Finally, you can find your true profit.

  • Gross Profit: $7,500
  • Operating Expenses: - $4,092
  • Net Profit: $3,408

Your $15,000 "successful" store actually generated $3,408 in profit. This is not good or bad. It is simply the truth. Now you can make smart decisions.

How COGS Fixes Your Pricing

The owner in our example was busy, but were they profitable enough? A $3,408 profit on $15,000 in sales is a 22.7% net margin. That's quite healthy.

But what if the owner was pricing based on competitors? What if they were only charging $25 per wallet because a competitor was?

Let's look at the units.

  • Total wallets sold = 100 (Beginning) + 400 (Purchases) - 150 (Ending) = 350 wallets.
  • Total Revenue = $15,000.
  • Average Sale Price = $15,000 / 350 = $42.85.

Now let's find the true cost per unit sold.

  • Total COGS = $7,500.
  • Total Wallets Sold = 350.
  • COGS per Unit = $7,500 / 350 = $21.43

This $21.43 is the real cost to sell one wallet (including the wallet itself and the shipping box). The owner thought their cost was $20. But the packaging added $1.43 to every single sale.

If they had priced their product at $30 based on a competitor, their Gross Profit per sale would have been ($30 - $21.43) = $8.57. After paying for shipping, ads, and platform fees, their net profit might have been zero.

By knowing your true COGS per unit ($21.43), you can price with confidence. If you want a 50% Gross Margin (a healthy target for e-commerce), you would use this calculation:

Target Price = Cost / (1 - Target Margin)

Target Price = $21.43 / (1 - 0.50) = $42.86

This calculation confirms that the owner's pricing was correct. But they would have had no way of knowing this without first calculating their COGS.

Stop Guessing, Start Calculating

Calculating your COGS is not just an annual chore for your accountant. It is the most powerful strategic tool you have.

It is the only way to move from feeling "busy" to knowing you are "profitable." It gives you the power to set prices, manage your supplier costs, and understand which products are really making you money.

The process requires two things:

  1. Accurate inventory tracking. You must know what you have and what you paid for it.
  2. Clean bookkeeping. You must correctly categorize every single expense as either a COGS or an Operating Expense.

This can feel like a lot of work when you are busy packing orders. But without it, you are flying blind. This foundational work is what separates a temporary hustle from a sustainable, long-term business.

If you are a Houston-based e-commerce owner feeling overwhelmed by these numbers, this is precisely what we help with. We can untangle your expenses, set up a system to track your COGS correctly, and give you the clear financial reports you need to finally know your true profit.