5 Tips to Lower Your Shopify Cost of Goods Sold in 2025

What makes some Shopify stores more profitable than others, even when selling similar products? The answer often lies in managing Shopify Cost of Goods Sold (COGS). High COGS can quickly shrink margins, while strategic control can fuel sustainable growth. This guide explains why COGS matters, how to calculate it, and proven ways to reduce it. Discover actionable strategies to lower costs and boost profitability. Let's keep reading to learn more!

Understanding Shopify Cost of Goods Sold (COGS)

What Is COGS?

Shopify Cost of Goods Sold (COGS) measures the total direct expenses tied to the items sold through a store. It includes costs like raw materials, purchased goods, and labor linked to production. Often called the “cost of sales,” it highlights what it takes to create or source products. Tracking this number shows how much is spent before profits are made. A clear view of COGS helps businesses set accurate prices and make informed financial choices.

Common Factors Driving High COGS on Shopify

COGS does not stay fixed. Several elements can increase the total, reducing the profit left after each sale. The main contributors include:

• Materials: All costs related to components, raw items, and purchased goods. This includes every piece required to make a product or stock it for resale. When raw material prices climb, overall COGS also rises.

• Labor: The wages of staff directly involved in making, assembling, or preparing goods for shipment. It also covers equipment use, tools, and handling costs before items reach storage. Labor often represents a major share of overall product expenses.

• Operations: The support system behind production and selling. This may include office expenses, rent, utilities, and software tools. While not directly tied to a single unit, these costs influence how much profit can be retained.

When these factors are not managed carefully, they can quickly shrink margins. Even small changes, such as supplier price increases or rising labor costs, can push COGS higher.

Why COGS Is Crucial for E-commerce Success

Managing Shopify Cost of Goods Sold is central to running a profitable store. It affects every financial decision and long-term growth strategy. Here’s why it matters:

• Accurate profit margins: Revenue alone does not show real earnings. True profit comes after subtracting COGS and other expenses. Monitoring COGS reveals how much money is kept after sales.

• Smarter pricing: Setting prices without knowing COGS risks undercharging or overpricing. When prices are too low, profit disappears. When prices are too high, customers switch to competitors. COGS data supports balanced pricing that maximizes sales and profit.

• Tax advantages: Since COGS counts as a deductible expense, it reduces taxable income. Lower reported profits mean lower tax bills, freeing up cash for reinvestment.

• Better inventory control: High COGS may point to slow-moving items or inefficient sourcing. Tracking these insights helps merchants adjust stock, improve cash flow, and focus on high-performing products.

How to Calculate Shopify Cost of Goods Sold?

Here’s how to calculate Shopify Cost of Goods Sold (COGS) in a clear, reliable way:

• Shopify Cost of Goods Sold = (Beginning Inventory + Purchases During Period) − Ending Inventory.

To break that down: beginning inventory is the value of all products/stock at the period’s start. Purchases during the period include all stock bought, raw materials, and direct costs of production. Ending inventory is what remains unsold at the period’s end.

Here is an example:

Suppose the starting inventory is $20,000. During the year, purchases total $80,000. At year-end, unsold inventory is worth $25,000. Then:

• ($20,000 + $80,000) − $25,000 = $75,000 COGS.

That means $75,000 is the cost tied directly to the goods sold in that time frame.

Accurate input values are essential. Hence, merchants must track inventory counts, supplier invoices, shipping, and import costs into the product cost. You should use consistent valuation methods (LIFO, FIFO, and weighted average). That also helps align Shopify financial reports with tax and accounting requirements.

5 Tips to Lower Shopify Cost of Goods Sold for Merchants

Here are some proven methods to lower Shopify Cost of Goods Sold. Applying several tips together gives the biggest impact:

Tip 1: Optimize Your Supplier Relationships

Strong supplier relationships lead to better pricing, more reliable deliveries, and fewer surprises. Negotiate bulk discounts, longer-term contracts, or favorable payment terms. Vet suppliers not just on price but also on quality and on-time delivery. Sometimes switching supplier locations or buying from manufacturers directly lowers per-unit cost significantly.

Use supplier performance metrics: track lead times, defect rates, and delivery costs. Always compare multiple quotes before making big purchase commitments.

Tip 2: Streamline Inventory Management

Holding too much stock ties up cash and raises storage costs. You should use demand forecasting tools to order just enough inventory. Keep safety stock low but realistic.

In addition, consider implementing systems to track inventory in real time across locations. Preventing overstocking or stockouts is another solution. Rotate stock using FIFO or similar methods. You must dispose of deadstock or redistribute it before it becomes a cost burden.

Tip 3: Reduce Shipping and Fulfillment Costs

Shipping and fulfillment often add hidden COGS. Analyze current shipping contracts. Negotiate with carriers for better rates or volume discounts. Use dimensional weight wisely; avoid packaging that causes oversize shipping charges.

Outsource fulfillment in some cases. Third-party logistics (3PL) providers can offer lower rates, especially when handling large volumes or optimizing routes. Use Shopify-integrated fulfillment apps to track costs, times, and errors.

Bundle orders or use consolidated shipping when possible. When orders are grouped, per-order fulfillment cost drops. Also, consider local fulfillment centers to reduce transit distance and time; faster delivery may also reduce returns and customer dissatisfaction.

Tip 4: Leverage Technology and Automation

Technology tools cut manual errors and reduce labor costs. Automate purchase orders based on inventory thresholds. Use apps that sync Shopify stock levels in real time with warehouses. This avoids delays and overstock.

Use analytics dashboards. Track cost per product, supplier performance, shipping cost, and other metrics. Identify which items eat into margins. Some Shopify apps pull data from multiple channels to give a unified view.

Adopt tools for forecasting and reporting. Forecasting tools lower stock-outs and surpluses. Reporting tools show inefficiencies—slow movers, excess freight costs, or packaging waste.

Tip 5: Rethink Product Mix and Pricing Strategy

Some products cost too much to be profitable. Analyze product performance. Drop or revise those with low margins or slow sales. Focus on items with higher profit per unit.

Adjust pricing to reflect full cost. Include cost of materials, labor, shipping, and fulfillment. Use bundling or tiered pricing to increase average order value. Sometimes raising prices slightly on popular products can offset rising costs elsewhere.

Best Apps to Track Shopify Cost of Goods Sold

Here are some of the best apps that help merchants track Shopify Cost of Goods Sold (COGS). These tools automate accounting, sync inventory, and make profit insights easier.

#1. QuickBooks Online Global

QuickBooks Online Global integrates Shopify data directly into full accounting workflows. With accurate sales, fees, inventory, and COGS entries synced, bookkeeping becomes less manual. It gives a clear profit picture by combining Shopify and accounting data in one place.

Key Features:

• Automatic syncing of orders, refunds, and fees from Shopify into QuickBooks.

• Inventory syncing so stock value and COGS align with accounting records.

• Real-time or daily updates, depending on the plan.

• Different pricing tiers (free/basic to more advanced) depending on the number of orders.

Best for: Stores needing strong bookkeeping accuracy

Pricing: $30–$55/month, depending on tier + connector fees

#2. MYOB Sync

MYOB Sync by Amaka automates the flow of Shopify data (sales, inventory, and COGS) into MYOB accounting software. It ensures sales and inventory movements are captured daily. This helps merchants avoid discrepancies between Shopify stock and accounting records.

Key Features:

• Orders, refunds, payments, customers, and products sync every 15 minutes in higher tiers.

• Inventory levels updated to avoid overselling.

• Map different payment methods and orders/refunds to correct accounts.

Best for: Stores using MYOB accounting

Pricing: Free - $29/month

#3. Inventory Planner by Sage

Inventory Planner by Sage focuses more on forecasting demand, optimizing stock levels, and avoiding overstock or stockouts. While it is not a pure accounting app, knowing what inventory carries cost and how stock moves helps plan purchase decisions. It indirectly supports COGS by reducing waste, holding costs, and overinvestment in slow-moving products.

Key Features:

• Demand forecasting based on sales history and seasonality (helps predict future needs).

• Inventory health metrics that show what items sit too long or cost money in storage.

• Recommendations for reorder points and quantities to balance holding cost and availability.

• SKU-level insights to see which products may be eating into margins.

Best for: Merchants managing large inventory or multi-location stock

Pricing: Starting at $119.99/month

#4. TP: True Profit Analytics

TP: True Profit Analytics gives merchants real-time profit and loss visibility that includes all cost inputs – product cost, shipping, transaction fees, advertising spend, etc. It helps find which products or channels deliver healthy margins and which cause losses. Real-time dashboards and detailed reports help avoid surprises at the end of the month.

Key Features:

• Auto-tracking COGS, shipping, transaction fees, taxes, and custom cost lines.

• Product-level profit analytics, showing margin by item.

• Integration of marketing/ad spend across multiple channels to connect acquisition cost with product profitability.

Best for: Brands with ad spend and multi-channel costs

Pricing: $35-$200/month

#5. Xero

Xero provides accounting tools that work well with Shopify when paired with integration apps. Daily or scheduled syncs let sales, refunds, fees, inventory changes, and COGS data move into Xero automatically. This reduces manual entry, improves cash flow visibility, and helps ensure financial reports are accurate.

Key features:

• Automatic daily summary of Shopify sales, fees, shipping, and refunds to Xero.

• Inventory and COGS line items in Xero when SKUs match between Shopify and the Xero setup.

• Ability to reconcile payouts and see cost breakdowns in the Xero dashboard, improving profit/margin insight.

Best for: Smaller stores needing affordable, reliable sync

Pricing: Free - $13/month

How to Track Shopify Cost of Goods Sold: Best Practices

Tracking Shopify Cost of Goods Sold requires consistent methods and the right tools. Following best practices ensures accurate reporting, smarter pricing, and stronger profit margins. Here are proven approaches to keep COGS under control:

• Implement accounting integration: Connect the Shopify store to accounting software like QuickBooks, Xero, or MYOB via services such as Amaka. This syncs sales, inventory changes, refunds, payments, and COGS data automatically. It reduces manual entry, limits errors, and helps financials stay up to date.

• Perform regular cost reviews: Set weekly or monthly checks of cost reports in Shopify. Compare actual product costs, labor, shipping, and fees over time. Detect price changes from suppliers or cost overruns early. Adjust prices or sourcing based on those insights.

• Track inventory accurately: Enable inventory tracking for every product. Enter the correct purchase costs for incoming items. Make updates when costs change.

• Reconcile all data sources: Match Shopify reports, accounting records, supplier invoices, and shipping costs. Ensure that what shows in accounting software aligns with what Shopify tracks. Fix mismatches immediately. This avoids unseen losses.

• Use data for strategic decisions: Use COGS data to see which products or SKUs carry higher costs. Drop or adjust poorly performing items. Adjust pricing to reflect true cost. Plan inventory with high-margin items in focus and monitor trends.

FAQs About Shopify Cost of Goods Sold

How often should I review my COGS?

Reviewing COGS monthly is best for accurate profit tracking, though weekly checks work well for stores with fast-moving inventory.

Can I track COGS automatically with Shopify apps?

Yes. Apps like QuickBooks, Xero, True Profit Analytics, and Inventory Planner automate COGS tracking by syncing sales, inventory, and costs.

What’s the difference between COGS and operating expenses?

COGS includes direct product costs like materials, labor, and production. Operating expenses cover overhead like rent, marketing, and software.

How much should Shopify merchants aim to reduce COGS by?

There is no fixed target. The goal is to lower costs without sacrificing product quality or customer satisfaction.

Is free shipping included in COGS?

No. Shipping costs are typically treated as operating expenses unless directly tied to product production.

How do returns and refunds affect COGS?

When items are returned, the related COGS is adjusted to reflect the product’s restock or loss.

Can dropshipping reduce my Shopify COGS?

Dropshipping removes inventory and warehousing costs but usually comes with higher per-unit prices from suppliers.

Do packaging and shipping fees count as part of COGS?

Basic packaging used to deliver the product can be included in COGS, but shipping fees are generally recorded as fulfillment or operating expenses.

Final Thoughts

Managing Shopify Cost of Goods Sold is the foundation of building lasting profitability. From supplier negotiations to smart inventory control, every choice influences margins. Apps and automation add further support, giving real-time insights that simplify financial planning.

Lowering Shopify Cost of Goods Sold is not only about saving money; it is about creating room for growth. Merchants who track and optimize costs consistently position their stores for stronger performance and competitive advantage.