COGS for Service Businesses – Not Really Zero!Posted by Celeste
When figuring out your pricing and your margins, knowing your Cost of Goods Sold (COGS) is vital. But what if you are selling services, not goods? There are still COGS for service businesses, but they are not so tangible.
In a previous blog post, I explained the concept of COGS. In doing so, I used a simple example that produced a food product. The COGS for that little product was the cost of ingredients. But what if we took the example of some kind of service provider? What if your business does something that takes no materials?
In such cases, we look at direct labour hours as the COGS. Take for example, a Massage Therapy Practice. This business does not sell a product, it performs a service. The materials that go into performing this service are minimal – some kind of massage oil and that is about it. The thing that is being sold here is time. More specifically, the time of the very skilled labour of the registered massage therapists. For this business, we could look at the massage therapists’ time spent with clients as the main COGS. The time that is spent doing other task around the clinic would be considered part of overhead or an operating expense.
Why is it important to know what your COGS are? Well, this will help you see how much you need to sell so that you can reach your breakeven point. Service businesses (heck, ALL businesses) need to know whether or not they are making money and how much they need to sell to turn a profit.
How has your service business accounted for COGS?
Photo Credit: http://www.flickr.com/photos/wonderlane/3276159998/