The importance of GMV for ecommerce and marketplaces
Wondering where to start when it comes to measuring your company’s revenue? While there are many different ways to do this – such as Monthly Recurring Revenue (MRR), Customer Lifetime Value (CLV), and Net Revenue Retention (NRR) – a good place for e-commerce companies to start is with Gross Merchandise Value (GMV).
What Is Gross Merchandise Value?
Gross Merchandise Value (GMV) is the total value of merchandise sold within a given time period. Also sometimes referred to as Gross Merchandise Volume, GMV is a basic revenue metric used by e-commerce companies.
Typically, businesses use this metric on a quarterly or annual basis in order to have a comparative financial metric they can use to analyze how their total sales volume changes from one given period of time to another. This enables them to better visualize and understand their sales growth.
How to Calculate GMV?
There are several different ways to calculate GMV. One of the simplest methods involves just multiplying the sales price of goods by the number of goods sold. This is what the formula looks like:
Sales Price of Goods x Number of Goods Sold = GMV
For example, say you sold 100 shoes at $100 each. This would give you a GMV of $10,000:
100 x $100 = $10,000
Note: Keep in mind that GMV does not account for any fees, expenses, or other costs to the business. Instead, it is simply a measure of the value of the goods sold. To make this figure more accurate, you may want to include costs such as deliveries, returns, and discounts.
Segment by Sales Price
An alternative method of calculating GMV is to separate your orders based on sales price, then add those figures up. This is useful when you have multiple products priced at different amounts. This formula looks like:
(Sales Price of A Good x Number of A Goods Sold) + (Sales Price of B Good X Number of B Goods Sold) + … = GMV
Adapting our example from above, let’s say you sold 100 shoes, but at four different price points: $20, $50, $70, and $100. If you sold 50 pairs of $20 shoes, 10 pairs of $50 shoes, 20 pairs of $70 shoes, and 20 pairs of $100 shoes, you would have the following figures:
50 x $20 = $1,000
10 x $50 = $500
20 x $70 = $140
20 x $100 = $200
Next, you would just add these figures to get your GMV:
$1,000 + $500 + $140 + $200 = $1,840
Average Order Value
If you already know your Average Order Value (AOV). Then you can also calculate your GMV by multiplying your AOV by the number of orders.
GMV = AOV x Number of Orders
This is assuming that you only sell goods and that no other service inflating your AOV is added when your customers checkout (like insurance, shipping, or anything that is not goods).
Why Is GMV Important?
A primary reason why GMV has become such a widely used business metric for tracking sales revenue and performance is that it is so easy to use. You just need to know the total number of goods sold and their price – both easy figures to gather and calculate. This makes it an easy, fast, and accessible KPI that businesses can use as often as they want to gauge the health of their sales.
And the more often GMV is used, the more useful it will become. By calculating GMV regularly, businesses can track total sales volume figures throughout their history. This lets them compare current sales against previous financial periods, identify seasonal patterns, measure the performance of new products or features, and gather information they can use to better anticipate future sales growth.
In some cases, GMV can also be used as a comparison metric with competitors. Especially for companies selling products at similar price points, knowing how your GMV measures up against theirs can provide quick insights into how successfully you are performing. What Companies Measure and Track GMV?
If your company sells or facilitates the sale of merchandise, then GMV is bound to be a useful metric. This makes it especially useful for two big categories of businesses: marketplaces and e-commerce.
E-Commerce
With businesses built around the sale of merchandise, pretty much every e-commerce company tracks their GMV. It is one of the most efficient ways to quickly learn how well their business is doing. However, successful e-commerce businesses like Amazon don’t track GMV alone.
Instead, they look at how it evolves over time, while also analyzing it alongside other key performance indicators, such as Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV), and Net Merchandise Value (NMV). This gives them a larger, more nuanced view of their sales and performance.
Marketplaces
While these companies don’t sell merchandise directly to consumers, they do make it possible for other consumers to sell directly to each other. This is why they’re also known as customer-to-customer (C2C) companies. Well-known examples include eBay and Etsy. Because they do not collect the total amount of revenue from each sale, marketplaces will typically multiply GMV by the percentage they take (their “take rate”) in order to get a better idea of their true revenue.
For instance, if eBay had a GMV of $1M in the first quarter of the year, but they charged 5% of each sale, then their revenue would be $50,000.
Limitations of GMV
Although a key figure for many businesses, GMV does have its downsides. As you track and measure this metric, keep the following limitations in mind:
It doesn’t show profit. GMV only measures the amount of money made from products sold (i.e., your gross revenue). This means it does not take into account additional fees like shipping, discounts, marketing costs, and returns. If a company wants to know how much money they are taking home at the end of a financial period, then they will have to go beyond GMV and calculate their net income instead.
It doesn’t show the whole picture. Learning how to maximize sales and grow your business requires a comprehensive understanding of where your money is coming from. GMV is not the best metric for this. While you can use it to quickly learn how well your products are selling (including individual product lines), you won’t be able to use GMV to see how much revenue is from repeat customers or how many of them purchased products in-store versus online.
It doesn’t reflect the real value of goods. Unless you run a C2C business, in which case you can just multiply GMV by your take rate to get your revenue, you will have to take into account the cost your company incurs from producing, purchasing, and stocking each product. Knowing the true value of your products is a crucial part of figuring out your net sales.
So what’s the bottom line? As long as you pair it alongside other metrics and don’t look at it in isolation, GMV is a quick and useful way to measure how well your business is doing.
