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Gross Merchandise Value (GMV): What It Is, Formula, Example

The fast-paced world of e-commerce and startups has identified Gross Merchandise Value (GMV) as a significant indicator of business success. In this article, we will explore the concept of GMV, its calculation system and its application in a startup. We’ll also discuss GMV’s pros and cons, compare GMV against Gross Transaction Value (GTV), and clarify whether GMV is the same as revenue.

What is Gross Merchandise Value (GMV)?

Gross Merchandise Value is a critical metric in the e-commerce and retail industry. It represents the total value of merchandise sold through a platform or marketplace during a specific time frame, typically a month or a year. GMV includes the prices of all products or services sold, irrespective of any discounts or returns. Essentially, it measures the overall economic activity of the platform, serving as a key performance indicator.

Is GMV the same as Revenue?

The correlation between GMV and gross revenue varies based on the e-commerce platform type. In instances like eBay, GMV represents the aggregate value of goods sold, distinct from the company’s actual revenue due to portions allocated to goods’ sellers. eBay’s revenue primarily stems from the fees charged on these sales.

How is GMV calculated?

The GMV calculation is relatively straightforward. It involves multiplying the number of units sold by the price at which each unit is sold. According to the Corporate Finance Institute, GMV is calculated ahead of accrued expenses for the item sold, including shipping to resellers, discounts, and marketing or promotions.

The formula for GMV is as follows:

GMV = Number of Units Sold × Price per Unit

For example, if an Australian dried fruit company based in South East Queensland sells 100 one-kilo packs of dried mango slices dipped in chocolate for $74.95 each, the GMV for that transaction is $7,495.

How is GMV measured in a startup?

For startups, GMV aligns with gross merchandise revenue, denoting the overall income generated by a company through its product or service sales. It’s crucial to assess GMV alongside net sales, considering deductions, to gain a comprehensive understanding.

GMV’s Advantages and Disadvantages 

Advantages

Measuring the overall sales value offers insights into a company’s performance, particularly in scenarios where retailers act as intermediaries between buyers and sellers without direct involvement in goods production. This holds true in the customer-to-customer market, where retailers serve as connectors without assuming the roles of buyers or sellers.

This approach holds relevance in the consignment sector as well, where retailers act as authorised resellers for others’ merchandise or property without owning the items. Despite housing these items, the retailer functions as a facilitator, often for a fee, and doesn’t retain ownership. The original owners can reclaim their items if desired.

Disadvantages

While GMV represents the total sales value on a C2C platform, it doesn’t fully mirror a company’s profitability; instead, it primarily reflects the revenue generated from fees. For instance, if a company’s GMV for a month was $1000, the company doesn’t pocket the entire sum—most of it goes to the individual sellers. The actual revenue for the company stems from the fees it charges, say, at a rate of ten percent, resulting in $100 revenue from that $1000.

Furthermore, GMV might have limitations depending on the e-commerce site type. For instance, for an online retailer producing and vending its goods, while GMV signifies revenues, it remains just one metric, offering a restricted viewpoint. It fails to reveal customer visitation numbers or the revenue from repeat customers, crucial factors for gauging customer satisfaction and the company’s long-term health.

What are Customer-to-Customer Retailers?

Customer-to-Customer (C2C) retailers establish a platform for sellers to list their inventory and for buyers to locate desired items. Acting as an intermediary, the retailer facilitates transactions, usually charging a fee, yet remains separate from the buying or selling process.

In many C2C sales, the facilitating retailer never handles the physical merchandise. Instead, once the financial transaction concludes, the seller directly ships the item to the buyer.

This contrasts starkly with retail models where the retailer procures merchandise from producers, manufacturers, or distributors, assuming the role of an authorised reseller for purchased goods.

Some business experts emphasise the significance of C2C retailers in contributing to GMV. C2C platforms provide sellers with the opportunity to advertise their merchandise to customers worldwide. This global reach enables customers to find products they may not locate in local stores, such as specific paint sets for particular model kits. Additionally, the C2C platform may offer affordable registration or membership fees, allowing businesses to set up shop with minimal investment.

What is Gross Transaction Value (GTV) and its relation to GMV? 

GMV, which is the total monetary worth of all sales within a marketplace over a specific timeframe, differs from gross transaction value (GTV), which specifically computes revenue concerning commissions. GTV finds prominence in commission-based businesses, being a product of items sold multiplied by the collected price.

The calculation involves multiplying the number of transactions by the average order value and the total number of transactions and items sold. It’s favoured among e-commerce platforms hosting multiple sellers conducting transactions.

Example of GMV

Two prominent C2C platforms, eBay and Etsy, illustrate this scenario. In the first quarter, eBay recorded the sale of 100 items priced at $5 each, resulting in a GMV of $500. At the same time, Etsy sold 80 items at $4 each for a $320 GMV.

Despite eBay’s higher GMV of $500 compared to Etsy’s $320, this data doesn’t present the complete picture. These platforms retain only a portion of the revenue, as sellers receive their share. eBay and Etsy derive their actual revenue from the fees they charge.

For instance, eBay charges a two per cent fee, generating $10 in revenue ($500 x 2%). Meanwhile, Etsy’s higher fee of 4% results in a revenue of $12.80 ($320 x 4%). In this context, Etsy’s performance shines as it generates higher net revenues despite the lower GMV.

Conclusion

Gross Merchandise Value (GMV) is a significant metric in the e-commerce and startup landscape. It provides a valuable snapshot of a company’s growth, can attract investors, and help refine pricing strategies. However, it’s crucial for startups to recognise that GMV alone is not an indicator of profitability and should be used in conjunction with other financial metrics.

DISCLAIMER: This article is for informational purposes only and is the opinion of the author. BARTERCARD has no business interests in any company mentioned.

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