How Reducing Cost of Goods Sold (COGS) Can Boost Your Business Profitability
Running a successful business isn’t just about generating more sales — it’s about keeping more of what you earn. One of the most effective ways to do that is by reducing your Cost of Goods Sold (COGS).
COGS refers to the direct costs associated with producing or sourcing the products you sell. This includes raw materials, manufacturing labour, freight and packaging. In service businesses, it could mean direct labour or subcontractors involved in delivering the service.
By managing and reducing COGS, you can improve your gross profit margin, which is the money left after covering production costs. That money can be reinvested into your business, used to pay down debt or increase your take-home income.
It’s not about cutting corners; it’s about becoming smarter and more efficient with the way your business operates.
What Goes Into COGS?
Understanding what contributes to COGS is essential to managing it. Typical COGS items include:
- Raw materials or components
- Direct labour (wages of workers directly involved in production)
- Manufacturing overheads
- Shipping or freight-in costs
- Packaging and assembly
- Contracted services (for some service businesses)
It’s important to separate COGS from overheads like rent, marketing or admin costs. Those fall under operating expenses. Reducing overhead is helpful but targeting COGS gives you a more direct line to improving gross profit.
Five Proven Ways to Start Reducing Your COGS
1. Negotiate Better Supplier Terms
Your suppliers play a big role in determining your margins. Many businesses fail to review supplier agreements regularly. Ask yourself:
- Can I negotiate volume discounts?
- What are the price breaks at higher order quantities?
- Are there alternative suppliers with comparable quality and lower costs?
2. Streamline Production Processes
Bottlenecks and inefficiencies can silently inflate your COGS. Whether you're manufacturing or assembling, look for:
- Tasks that can be automated or semi-automated
- Staff training that improves speed and reduces waste
- Process mapping to identify redundant or manual steps
Even minor workflow improvements can significantly cut production time and labour costs over a year.
3. Re-evaluate Product Design and Packaging
Sometimes it’s not how you're making the product — it’s what you're using to make it. Reconsider:
- Expensive materials that could be substituted without quality loss
- Packaging that’s oversized or over-engineered
- Products that include non-essential components
4. Optimise Inventory Management
Excess stock ties up working capital and incurs storage costs. Worse, it can lead to wastage or obsolescence. Smart businesses use:
- Inventory turnover ratios to guide purchasing decisions
- Just-in-time (JIT) inventory methods for faster-moving products
- Inventory management software for real-time insights
Consider bundling slower-moving products or using them in promotional packs to improve stock movement.
5. Outsource Strategically
You don’t have to do everything in-house. Sometimes, outsourcing elements of production, packaging, or logistics can reduce COGS, especially if you lack scale.
For example, co-packing or white-label production may allow you to achieve better unit economics than managing production solo.
What Reduced COGS Looks Like in Practice
Here’s how a smart approach to COGS can create real impact:
- A boutique food brand reduced freight costs by 25% by switching to a shared delivery network.
- A light manufacturing business saved $60K per year by consolidating three separate suppliers into one integrated vendor who offered bundled pricing.
- A professional services firm increased project profitability by switching to fixed-price subcontractors with clearer deliverables and timelines.
In each case, the COGS review wasn’t about slashing costs recklessly. It was about analysing the numbers, identifying inefficiencies and making informed, strategic changes.
When Was the Last Time You Reviewed COGS?
Many business owners focus on increasing revenue, but few spend enough time improving how that revenue turns into profit.
A structured COGS assessment can reveal hidden inefficiencies and unlock thousands of dollars in potential savings each year. That could be the difference between a business that survives vs one that thrives.
This isn’t just for product-based businesses either. Service-based businesses can and should assess the cost to deliver their services and look for similar savings.
If you’re unsure where to start, consider working with Alliott NZ who can help you:
- Identify what’s included in your current COGS
- Benchmark your figures against industry standards
- Recommend specific changes to systems, suppliers or workflows
Ready to Maximise Profit Without Selling More?
Reducing your COGS is one of the fastest and most effective ways to grow your bottom line. You don’t need to work harder or chase more sales — you just need to work smarter.
Book a COGS review to uncover the hidden profit in your business. Contact Alliott NZ in Newmarket Auckland to explore how small changes can create big results.
