Landed COGS: What Belongs In It
Cost of goods sold is not the price you paid your supplier. It is everything required to put one sellable unit on the shelf in the country you sell in. Most sellers undercount COGS by 15–30%, and discover it only when the bank account empties faster than the revenue dashboard suggests.
The full COGS stack
Starting from the factory and working forward: factory unit price (ex-works or FOB), inbound freight (air or ocean, allocated per unit by weight or volumetric weight), import duties and tariffs (HS code determines rate — confirm yours with a customs broker before placing your first order), customs broker fee (allocated per unit based on shipment size), destination port handling and drayage, inbound 3PL or warehouse receiving fee, product inserts and retail packaging materials, quality control inspection cost (allocated across units inspected), and a returns reserve (discussed separately below).
Not every seller has all of these. A US-based maker sourcing materials domestically has no import duties but still has inbound freight, materials cost, packaging, and quality labour time. A drop-shipper has almost none of these but has a wholesale margin baked into their supplier price. The principle is universal: landed COGS is everything spent before the unit reaches your outbound fulfilment location, fully allocated per unit.
The freight allocation trap
A common mistake: allocating freight by unit count when units have wildly different weight or volume. A 0.5lb item and a 6lb item on the same container should not carry the same freight allocation per unit. Allocate by actual weight or volumetric weight (length × width × height in inches divided by 139 for air freight), whichever the carrier uses for billing. Getting this wrong can make a heavy product look profitable in the model while a lightweight product subsidises it.
For mixed-SKU shipments, build a freight allocation spreadsheet before placing the order and use it to gate sourcing decisions. If a new product cannot carry its proportional freight cost and still hit your target margin, either negotiate a lower FOB price, find a lighter packaging solution, or do not add the product to the shipment.
Tariffs in 2026
Tariff rates on goods manufactured in China moved significantly in 2025 and remain elevated in 2026. Rates on consumer goods from China range from 0% on some electronics components to 25%+ on many finished consumer products, with additional Section 301 tariffs layered on top for specific categories. The difference between a 7.5% and a 25% tariff rate on a $12 FOB product is $2.10 per unit — a margin-defining amount for most categories.
Confirm your HS code with a licensed customs broker before finalising your sourcing costs. Many small importers use incorrect or approximate HS codes, which can result in either overpaying duties or facing audit risk if underpaying. The one-time cost of a customs broker consultation is typically $200–$400 and pays for itself within a single shipment for any meaningful volume.
Quality control costs
Third-party quality control inspection (a pre-shipment inspection by a firm like Bureau Veritas, SGS, or a smaller specialist) typically costs $250–$350 per inspection day. For a shipment of 500 units, that is $0.50–$0.70 per unit. This cost is often omitted from unit economics models on the basis that inspections are "occasional" or "discretionary." They should not be. A 2% defect rate that reaches customers costs far more in returns, reviews, and customer service than $0.60 per unit.
The returns reserve
Reserve for returns at the COGS line, not the revenue line. If your category returns at 12% and you scrap 30% of returns (unusable condition), your effective COGS uplift from returns is: return rate × (platform commission non-refunded + return shipping + scrapped unit COGS × scrap rate). For a $30 product at 12% returns with 30% scrap, this adds roughly $0.90–$1.40 per unit to effective COGS. Build it in. The accounting that does not is the accounting that surprises you at year-end.
Many sellers find it easier to think about returns as a COGS multiplier rather than a separate line item. If your raw COGS is $8.00 and your effective return-adjusted COGS is $9.20, use $9.20 in your unit economics model. This approach prevents the common mistake of reporting "great margins" at the individual order level while the portfolio-level P&L is eroded by a returns rate you accounted for nowhere.