What is Gross Merchandise Value (GMV)?

Have you ever wondered what that total sales number means when an e-commerce company boasts about hitting record-high gross merchandise value (GMV)?

As an entrepreneur and investor in startups, I’ve learned that GMV is a crucial metric – but also one that can be misleading if not understood properly.

In this post, we’ll dig into the definition of GMV, why it matters, how to calculate it accurately, and most importantly, how to interpret GMV in the right context.

What is Gross Merchandise Value (GMV)?

Gross Merchandise Value or GMV refers to the total value of all orders facilitated by an e-commerce company over a certain time period. So if a business sold $5 million worth of products in a year, its annual GMV would be $5 million.

Here’s a simple analogy to help explain GMV:

An e-commerce company is like a bazaar organizer that provides shops or stalls for multiple merchants to sell their products. The total value of ALL goods sold in the entire bazaar is the GMV for the bazaar organizer.

So in technical terms, e-commerce GMV includes:

• Value of all products sold on an e-commerce marketplace from third-party sellers
• Value of any first-party sales by the e-commerce company directly to consumers
• Total sales from any services offered by the platform (for example: advertising)
• Value of sales done on apps or sites integrated with the e-commerce platform

Note that GMV applies specifically to marketplaces and aggregators where they sell goods/services from other businesses, and since they charge commissions, there is a significant difference between the gross merchandise value and their actual sales

Overall, the higher the GMV, the more successful an e-commerce company is considered to be. After all, who doesn’t want growing sales?

GMV and Revenue Difference in Marketplaces

E-commerce marketplaces like Amazon, UberEats, Airbnb, etc. act as a platform to facilitate transactions between third-party sellers/service providers and consumers looking for products/services.

As an intermediary, these platforms have two revenue streams:

1. Commissions: A percentage fee they charge the seller on every successful sale or transaction facilitated. This ranges from 5-20% on average.

For example, an Uber driver pays Uber roughly 20% of the ride billing as technology facilitation charges.

2. Additional fees: Other fees like payment gateway charges, advertising subscriptions, etc. also accrue revenues.

However, the total transaction value or order size paid by the end customer is significantly higher.

For example, on a $100 restaurant meal order placed via UberEats:

• GMV = $100 total meal order
• UberEats Revenue = $20 commission fees charged to the restaurant + any delivery fees paid by the customer

So for aggregator models, GMV overstates the platform revenue and profits as they only earn a commission on the total commerce rather than owning the whole value.

This variance is highest for marketplaces and smallest for direct e-commerce retailers who:

a) Sell their products directly b) Own the entire product cost + profit margins

Why GMV Matters

As the founder of multiple startups, I can tell you that GMV is an important metric because it shows the overall sales traction for an e-commerce business. Think of it like a speedometer for growth and scale.

Venture capitalists and founders closely track GMV to gauge the commercial potential of early-stage e-commerce startups. Once these firms achieve solid GMV velocity, they can raise bigger rounds to pour fuel on that growth engine.

Public market investors also look at GMV growth rates year-over-year while valuing larger e-commerce firms like Amazon or Shopify. The greater the GMV growth, the better the speculation around increasing revenues and profits in the future.

For ecommerce managers too, GMV serves as a vanity metric to get bragging rights and assess employee performance. After all, everyone wants to show they are driving higher sales!

But this focus on “bigger GMV is better” has some pitfalls as well. Let’s examine some key intricacies of GMV calculations next.

How to Calculate GMV

Tracking GMV seems simple enough – just tally up all sales done across the e-commerce ecosystem in a period.

However, because GMV aims to measure total commerce activity, it needs to account for various complexities in online selling models today:

1. Order Value vs Payment Value

E-commerce order values can change post-purchase due to cancellations, returns, and more. But GMV tracks the TOTAL order value at the time of purchase.

For example, if a customer buys a product for $100 but later returns it for a full refund, the GMV will still show $100 for that order.

2. Gross Value vs Net Value

GMV does not account for any costs involved in delivering the product to the customer. It reflects the GROSS merchandise value without subtracting commissions, logistics costs, advertising fees, payment gateway charges etc.

3. Authorized Payments

For certain products, customers may only authorize a payment during purchase flow but actual settlement happens later. A common example is hotels or travel bookings.

In such cases, GMV considers the total authorized transaction amount rather than just the final amount settled.

4. Taxes & Tips

If the e-commerce platform collects taxes, tips, service fees, etc. as part of the order value, they need to be included in GMV computations.

5. Cross-Border Trade

For global e-commerce firms, GMV totals should be calculated after any currency conversions to the base reporting currency. Usually, it is USD or the currency in their headquarters country.

6. Time Period

While annual GMV is commonly cited, firms track it across multiple cycles – daily, monthly, quarterly, etc. So it is crucial to state the associated period.

As you can see, accurately estimating GMV needs several adjustments from just looking at sales revenue in a quarter. This is why companies rely on data analytics tools to compute it.

Next, let’s examine why even accurately calculated GMV has some limitations in judging business performance.

Things that Can Distort GMV

While GMV measures commerce activity well, using it to compare e-commerce companies can be tricky because of factors that artificially inflate GMV:

1. Business Model Differences

Marketplaces like eBay allow third-party vendors to sell products. So their GMV will be higher compared to retailers who primarily sell their inventory directly.

Fintech Platforms like Paypal also report payment volumes as GMV but their business model is very different from selling merchandise online.

2. Category Differences

Some retail categories like automobiles or jewelry tend to have products with higher prices and value. Their GMV can run into billions of dollars very fast compared to everyday categories.

3. Discounting Strategies

E-commerce firms aiming for fast growth often use deep discounts, cashback offers, etc to boost sales in the short term. This increases GMV exponentially but may not be sustainable long-term.

4. Macroeconomic Factors

Currency fluctuations or inflation in different countries can also inflate GMV, especially for e-commerce companies operating globally.

So while GMV does signify commercial traction, assessing true financial health needs further analysis. This leads us to the crucial difference between GMV and Revenue.

GMV vs Revenue – What’s the Difference?

GMV refers to the total order value transacted on an e-commerce platform.

Revenue signifies actual income made by the e-commerce business from those transactions.

Let’s see this GMV vs Revenue distinction with an example:

Say a customer purchases a smartphone for $1,000 on an e-commerce site. Here the GMV for that single transaction is $1,000.

But the actual revenue made by the e-commerce company on this sale depends on its business model:

– If it is a retailer who procured the phone directly from the brand, revenue is the selling price minus procurement costs. For example, revenue is $200 if they procured the phone for $800.

– However, if this is a marketplace, the actual revenue is the commission fees they charge the seller and buyer for facilitating this transaction. This may be say 2% i.e. $20.

As you can see, GMV does not reflect profitability – a company may boast $10M GMV but lose money overall!

GMV is still useful as a growth indicator, but smart founders track revenues and margins to gauge true progress. Public investors have also wised up to focus on profitability rather than just GMV expansion.

This crucial distinction is why I always advise startups to not get swayed in vanity metrics that sound flattering but hide the real picture. Now let’s explore some other limitations of GMV.

Other Limitations of Using GMV

Here are four other key aspects to consider when relying on GMV figures alone:

1. Timing of Revenues

As we saw earlier, GMV captures total order value at the time of sale. However ecommerce businesses may recognize part of the earnings over time.

For example – the commission income from selling monthly software subscriptions is accrued every month rather than the entire year GMV realized during the initial purchase.

2. Overall Business Mix

Larger e-commerce conglomerates like Amazon, Alibaba, etc. have diverse business models today – online stores, offline stores, subscriptions, logistics, payments, and more.

Their overall GMV metric includes all these models and becomes less meaningful to assess any one segment’s profitability.

3. Geographical Differences

For global online retailers, GMV contribution across countries could vary significantly depending on local taxes, digital adoption, logistics infrastructure, etc.

High GMV countries may not always yield more revenues if associated costs are also higher.

4. Macroeconomic Changes

E-commerce has boomed in the last few years due to COVID-led digital adoption across categories like groceries, education, events, etc. These tailwinds are starting to ease now as the world opens up again.

So the breakneck GMV growth that investors were awed by during the pandemic may plateau or normalize now for many companies.

Therefore when assessing long-term value, GMV should be considered along with actual bottomline impact.

Next, we will apply this deeper GMV understanding to the valuation of e-commerce startups.

Valuing E-commerce Businesses Based on GMV

During 2021’s peak funding frenzy when record amounts of capital poured into ecommerce, GMV became a popular lever by venture capitalists to value such startups.

The math works like this:

• Publicly listed e-commerce leaders like Amazon, Shopify, etc. trade at X times their GMV per share
• So pre-IPO late-stage startups are valued at a discount to this public market GMV multiple since they are smaller and riskier
• But the expectation is that as the startup scales GMV, it will also gain higher multiples – earning big returns for early investors

For example, if Amazon has GMV per share of $500 and trades at 4x GMV ($2,000 price), an Indian challenger firm valued at 2x GMV would be priced accordingly:

• Say $50 GMV per share (at 1/10th Amazon’s scale)
• 2X GMV per share multiple would value it at $100 per share

This GMV-based pricing is often detached from actual revenues or margins during the early days. The promise is valuation expansion in the future as GMV multiples catch up.

However, public market investors are now prioritizing margins over growth. So founders need to build good unit economics even at smaller scales for better long-term value.

Relying solely on GMV mathematics without sound business models is bound to cause a hangover effect when funding winter kicks in. We saw that in 2022 with steep valuation corrections and shutdowns.

Nonetheless, GMV multiples still hold merit when used responsibly – let’s examine what ratios to track.

GMV Ratios to Understand Business Performance

While eye-popping GMV figures seem flashy, assessing key GMV ratios allows more diligent analysis:

GMV Growth Rate

Year on on-year growth rate in GMV shows how fast the e-commerce engine is accelerating.

• But it requires consistent GMV calculation methods across periods
• And needs adjustments for one-time events (say a 10x spike in hand sanitizers during the COVID pandemic skewing GMV)

Overall GMV sales per customer

This indicates the order value from an average customer over time.

• Rising sales per user imply they find more relevant products over time on the platform.

GMV to Revenue ratio

We discussed earlier that lower GMV to revenue indicates better unit economics i.e. ability to earn more from the sales being facilitated.

• A falling ratio over time means the startups have found ways to improve monetization.

Monthly Active Users (MAU) to GMV

Dividing GMV by the number of active monthly users shows the stickiness and revenue-generating power of the customer base.

• Higher GMV per MAU means the platform has loyalists spending more rather than deal hunters that will vanish.

Tracking such GMV ratios alongside broader revenue and profit goals allows founders to build sustainable, high-value companies.

Tactics to Increase GMV

Here are 5 proven tactics e-commerce businesses employ to drive GMV growth sustainably:

1. Loyalty programs: Offering perks and incentives for repeat purchases grows share of wallet from existing customers. This can increase order value and frequency over their lifetime.
2. Subscriptions: Signing up existing happy customers for recurring subscription delivery of consumable/replenishment products creates predictable GMV.
3. Bundling: Creative bundling of complementary products, especially to liquidate slow-moving inventory, can lift average order values materially.
4. Referrals: Referral reward programs that encourage existing buyers to promote your products among their social circles tap into new segments driving incremental GMV, often at lower costs.
5. Optimization engines: Smart engines that personalize product recommendations, marketing messages and pricing based on each user’s purchase patterns encourage engagement and order conversions.

Tracking GMV

E-commerce companies track GMV performance using:

• Inbuilt analytics: Platforms like Shopify and Magento offer dashboards to monitor daily, weekly, or monthly GMV. Additional segmentation by product line, geography, etc is possible.
• Payment processor data: Transaction value reports from payment gateways like Stripe or PayPal can be used for GMV tracking as well.
• Financial accounting tools: Software tools like QuickBooks or proprietary ERP systems also help calculate total sales from orders. Important to reconcile definitions and adjustments across various systems.

Key Takeaways

1. GMV shows overall commercial activity or topline sales transaction value for an e-commerce business before other deductions. It acts as a growth indicator and market size gauge.
2. However, multiplying GMV blindly to extrapolate revenue or profitability is erroneous since it excludes costs like returns, fees, etc. Assessing real bottom line health needs analyzing additional metrics like true revenues, customer acquisition expenses, and churn rates.
3. Platform business models involving commissions and aggregator fees lead to higher variance between their GMV versus actual revenues.
4. While GMV expansion does signify commercial progress in most cases, focusing solely on continuously maximizing GMV can skew incentives towards unhealthy practices like steep discounting or pushing unwanted inventory. Moderation is key.
5. Tactics around loyalty programs, bundles, subscriptions etc can sustainably grow consumer wallet share and order sizes driving healthy GMV expansion accompanied by profits. Automated personalization engines also assist.
6. For holistic monitoring, e-commerce executives track GMV data from varied sources like built-in sales dashboards, payment systems and financial accounting tools. Each provides complementary visibility.

In summary, GMV delivers an important topline understanding of ecommerce traction but assessing true financial performance requires a more comprehensive analysis by factoring costs, margins, and sustainability.