Gross Merchandise Value (GMV)

What is Gross Merchandise Value (GMV)?

The total value of merchandise sold through a customer-to-customer (C2C) exchange site over a given period is the gross merchandise value (GMV).

It is a measure of the business's growth or the use of the webpage to sell merchandise owned by others. Because revenue is a function of gross merchandise sold and fees charged, GMV is frequently used to determine the functioning of an e-commerce site's business.

It is most useful as a time-series comparison measure, such as the current quarter's value versus the previous quarter's value. GMV is another term for gross merchandise volume: both terms refer to the total monetary value of total sales.

It is calculated before any fees or expenses are deducted. As a result, it provides data that a retail business can use to measure growth, typically monthly or year-to-year.

A retail business can generally determine the gross value of all completed sales, though merchandise returns may need to be subtracted from this figure to provide an accurate calculation.

Understanding Gross Merchandise Value 

The most common metric used by e-commerce companies is Gross Merchandise Value. It primarily serves as a comparative financial metric for such businesses, allowing them to compare total sales volume from one recording period to total sales volume from another.

Finally, the metric is intended to assist businesses in understanding and quantifying their sales growth. GMV is expressed in dollars. Most e-commerce companies used the metric instead of revenue and/or sales data, especially when they first became popular.

Eventually, using GMV as a stand-alone reference or in place of other metrics was widely regarded as ineffective. However, GMV is a good indicator of growth and can be used to determine the overall health of an eCommerce business.

This is because it measures the volume and value of merchandise sold and the number of transactions completed. So, if your GMV is increasing, your business should be doing well!

GMV is most useful when used as a time-series comparative measure. This could be comparing current quarter sales to previous or year-on-year sales. Finally, Gross Merchandise Value is another way businesses comprehend and quantify their sales figures.

Importance of GMV

Some of the importance are:

• GMV can strongly indicate an online retailer's overall health and growth. This is because GMV measures the volume and value of merchandise sold and the number of transactions processed. Therefore, if GMV is increasing, the business may be doing well.
• It can be used to compare values over time. However, GMV is only sometimes an accurate metric for measuring the performance of an e-commerce business. This is due to two significant factors.
• It does not account for sales-related fees and expenses such as shipping costs, discounts, marketing, returns, etc. As a result, it needs to provide an accurate picture of your net sales, net income, or growth.
• It can be deceiving. When you place too much emphasis on GMV, you may be tempted to push expensive products, such as electronics, to increase GMV. However, the margins on those products are typically lower than those on less expensive items such as clothing.
• The best advice is to use other eCommerce KPIs in addition to GMV to estimate the growth of your business. For example, income, customer acquisition cost, customer lifetime value, average order value (AOV), conversion rate, churn rate, and other metrics can be used.

Factors for Improving GMV

GMV is one of the financial metrics one monitors, and one wants to see it rise. Because gross merchandise value is a direct measure of growth, intelligent e-commerce business owners look for ways to improve it.

Customers who do not have to pay for delivery are a popular option for online shopping. In addition, customers who are price sensitive and prefer an accessible pricing structure will appreciate the free shipping.

Upselling is a sales strategy that involves selling a better, costlier version of a product that a purchaser already owns. Meanwhile, cross-selling refers to selling products similar to those that a customer already acknowledges.

The following are the ways to improve GMV:

Where possible, provide free shipping

According to a UPS study, 58 percent of online shoppers are willing to add more items to their order in exchange for free shipping... So offering free shipping across the board or after customers reach a certain price threshold can greatly increase your GMV and overall sales.

This will raise the average order value as customers add more products to qualify for free shipping.

Spend money on cross-selling strategies

Cross-selling is an effective strategy for getting customers to buy more. The best part is that you don't have to do much to persuade them; the customer makes the final decision to buy more and expand their shopping cart.

One can include a "frequently purchased with this item" window on the product pages or can even offer some accessories as last-minute add-ons on the checkout page. I would be surprised how much this can increase gross revenue!

Bundles should be added

Offering bundles and packaged deals is another great way to encourage your customers to purchase more. This is not only effective for getting rid of some of the less-popular inventory, but it can also significantly increase the GMV.

Customers will be pleased to invest in a bundle because they will receive more products than usual for a much lower price, giving them the impression that they are getting a great deal.

Meanwhile, you're increasing average sales, eliminating excess inventory, and increasing your GMV.

Providing excellent customer service

Nearly 95% of customers say that customer service is essential in their brand selection and loyalty. Furthermore, 80 percent of customers value a company's experience as much as its products.

These are just a few important customer service statistics, but they demonstrate how an excellent customer service experience affects the bottom line.

When one takes the time to answer customers' questions on social media and live chat, he/she builds trust and makes them feel comfortable purchasing from them.

Return requests can be converted into new sales if the company handles them proactively. Instead of requesting a refund, the customer may be satisfied with an exchange.

Advantages and Disadvantages of GMV

Advantages are:

• Because retailers may or may not manufacture the goods they sell, calculating the gross value of all sales provides information about the company's performance.
• It may also benefit consignment retailers, who never officially purchase their inventory.
• Even though the items are frequently housed within a company's retail location, the business serves as the authorized reseller of another person's or entity's merchandise or property, often for a fee.
• It is simple and easy to calculate.
• Comparing the present gross values to previous ones can determine if and how much the company has grown. This can also be compared to other statistics, such as customer trends, advertising campaign responses, and product popularity.
• One can determine how much each product contributes to its overall gross value by calculating the total sale value of each of its products.
• Gross Merchandise Value can help a person show potential investors their business value.

Disadvantages are:

• Although GMV represents the total value of goods sold on a C2C exchange, it does not accurately reflect a company's profitability, specifically, the true revenue earned from fees.
• GMV is a limited metric that does not account for other factors, such as repeat customers.
• Although the GMV can tell about sales growth, it needs to account for how many visits each customer makes. Customer count can assist a business in determining how many customers they have, how frequently they visit, and whether the customer base and visit count are increasing.

How to Calculate Gross Merchandise Value

It can be calculated simply by multiplying the sales price of goods and the number of products sold.

It is given by:

Gross Merchandise Value = Sales Price of Goods x Number of Products Sold

Assume a company sells $25 umbrellas and sells 200 of them in three months. One would multiply 25 by 200 to get a value of $5,000 (i.e., the GMV or gross merchandise value) for the period in question.

Gross Merchandise Value Example

Consider two popular e-commerce websites, namely ABC and XYZ. During a fiscal year, ABC sold 200 products worth $10 each. This results in GMV for ABC in that fiscal year being 200 * 10 = $2000.

Also, suppose that XYZ sold 150 products worth $8 each in the same fiscal year, resulting in a gross merchandise value of 150 * 8 = $1200.

This data shows that ABC performs better as it has a higher GMV. But if ABC charges a fee of 2% (2%*2000 = $40) and XYZ charges 4% fees (4%*1200 = $48), then it shows that, in reality, XYZ has a better performance as it has higher actual revenue of $48 in comparison with $40 of ABC.

GMV in E-commerce

Calculating GMV gives a good idea of how much growth a business is experiencing because it considers how much it sells. However, one should not rely solely on it to determine the health of a company.

This is because, while Gross Merchandise Value tells how much a company is growing, it needs to tell whether or not the company is profiting from the true value of the items it sells.

If GMV is a company's primary growth metric, it might prioritize more expensive, big-ticket items because their sales price will significantly bolster the total transaction value.

However, the margins on such products are frequently much lower than those on cheaper items such as clothing. Therefore, it is only sometimes an accurate representation of the performance of an eCommerce company.

It remains an important metric because it calculates the total gross sales value. Of course, the company manager wants this figure to be as high as possible because sales are the lifeblood of any eCommerce business.

When using this figure in comparison, one wants it to increase year over year or quarter over quarter. If it is rising, it means the company is selling more or selling more expensive items, which should benefit the bottom line.

Other E-commerce Growth Metrics

Other financial metrics that can help determine an e-commerce business's growth are:

1. Net Merchandise Value (NMV)

It is the amount left over after deducting all fees and expenses from the Gross Merchandise Value over time. It provides a more accurate picture of a company's performance because it accounts for costs, refunds, etc.

NMV = GMV - All Costs (Marketing, Refunds, Gateway Payments, etc.)

2. Customer Acquisition Cost (CAC)

It is calculated by dividing all costs associated with customer acquisition (including software costs, advertising team salaries, and so on) by the total number of customers acquired during the period in question.

This is an important metric because it tracks the effectiveness of the advertising as well as the cost of acquiring new customers. If this figure is too high, one will eat into the margins and waste money.

CAC = Total Marketing Spend / Number of Acquired Customers

3. Customer Lifetime Value (CLV)

It calculates how much customers will spend with the company throughout their relationship.

CLV tells how well a company retains its customers and how much they enjoy its product or service. The higher this number, the higher the profits.

If it's low, it signals that the customer retention strategy should be improved or that something in the product or service needs to be better.

LTV = AOV *(Number of Transactions) * (Retention Time Period)

CLV = LTV * Profit Margin

4. Average Order Value (AOV)

It keeps track of the average amount a customer spends on each order. After that, it is simply calculated by dividing total revenue by total orders.

A company wants this number to rise because it indicates that the customers are spending more money with the company, which links back to CAC and increases the CLV. If the amount is low, consider increasing the AOV.

AOV = Revenue / Total Number of Orders

5. Conversion Rate

It is one of the most important financial metrics for eCommerce websites. In addition, the conversion rate is an important metric that demonstrates how well your website converts visitors into customers.

Conversion Rate = Number of Transactions / Number of Sessions

6. Profit Margin per Product

It helps a company determine which products to promote, how much discount can be applied, and where one should keep a closer eye on things because margins are narrow.

Profit Margin per Product = (Product Price - Product Cost) / Retail Price

Researched and authored by Kavya Sharma | LinkedIn

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