GMV vs Revenue: A Deep Dive into Two Critical E-Commerce Metrics

For any business, metrics matter. But for e-commerce companies, two metrics stand above the rest in importance: Gross Merchandise Value (GMV) and revenue.

On the surface, these two figures may seem interchangeable – after all, they both measure sales right? But when you dig deeper, understanding the differences between GMV and revenue is crucial for making smart business decisions.

In this post, we’ll compare GMV and revenue to highlight why both metrics are vital. I’ll explain what each one measures, when to use each, and how to calculate them. With the right grasp of GMV vs revenue, you’ll be able to steer your e-commerce business toward growth and profitability.

Defining Gross Merchandise Value (GMV)

First things first – what exactly is Gross Merchandise Value?

GMV measures the total value of products sold by a company within a given time period. It encapsulates the collective value of all sales transactions, including taxes, shipping, and other charges.

Here’s a simple example:

• You sell a widget for $100
• With tax, shipping, and other fees, the total transaction value is $125
• The GMV from this sale would be $125

GMV doesn’t account for costs or other expenses – it focuses solely on the total sales dollar value.

Think of GMV as the top-line revenue figure before any other factors are considered. It’s an excellent indicator of overall business volume and growth. The higher your GMV, the more products customers are buying.

Why Track Gross Merchandise Value?

For e-commerce businesses, GMV offers three key benefits:

1. Measure Business Growth

As mentioned, GMV represents your total sales volume. Comparing GMV over time shows how your business is growing (or contracting).

For example, if your GMV was $1 million last month and $1.2 million this month, you’re seeing 20% growth – a clear sign things are headed in the right direction.

Tracking GMV also helps you set goals around business growth. You can aim to hit certain GMV targets by specific dates to maintain your desired expansion pace.

2. Benchmark Against Competitors

In e-commerce, your competition is just a click away. Customers can easily go elsewhere to buy the same products.

Tracking your GMV compared to competitors is vital for assessing your market position. If a rival’s GMV is growing faster than yours, it signals they may be stealing market share.

Comparing GMV can also help set competitive goals. For example, you may aim to overtake a competitor’s GMV within a certain timeframe.

3. Value Your E-Commerce Business

For retailers looking to sell or raise investment, GMV is a key valuation metric. In e-commerce, most businesses sell for a multiple of their GMV.

Higher GMV signals greater value, as it illustrates larger revenue potential. Investors want to see strong GMV growth over time, as it demonstrates the ability to scale revenue.

GMV Multiples for E-commerce Business Valuations

Common GMV multiples for selling an e-commerce business range from 1-5X, depending on maturity, profitability, and historical growth.

More active businesses with steady GMV expansion generally achieve higher multiples. Consider this in developing a valuation for a potential acquisition or investment.

Revenue vs. Gross Merchandise Value

At first glance, GMV and revenue may seem interchangeable. But while related, they measure two different things:

• GMV – Total sales dollar value
• Revenue – Total income minus costs, expenses, returns, etc.

Think of revenue as net sales, while GMV is gross sales.

To demonstrate the difference, let’s return to our widget example:

• GMV from selling a $100 widget is $125 (including tax/shipping)
• It cost us $50 to manufacture the widget
• So our revenue is $75 ($125 sale price – $50 costs)

In this case, GMV is $125 and revenue is $75. While GMV will always be equal to or higher than revenue, the gap between the two varies. This is what makes tracking both metrics vital.

When to Use GMV vs. Revenue

Should you focus on GMV or revenue? The answer depends on your goals:

Use GMV to track overall business volume. Since it encapsulates all sales dollars, GMV best reflects the total volume moving through your business.

Use revenue to track profitability. Revenue accounts for costs, so it’s the ultimate indicator of profitability. Monitoring revenue trends is key for making decisions to boost profits.

Here are a few examples of when to look at each metric:

• Deciding whether to run a promotion – check if the extra GMV outweighs the lower margins
• Forecasting future inventory needs – look at GMV to estimate total sales volume
• Measuring marketing ROI – compare revenue before and after a campaign
• Setting pricing – the balance between optimizing GMV and revenue

Think of GMV and revenue as two sides of the sales coin. GMV shows overall volume, while revenue reflects bottom-line profitability. Track both to get the full picture.

here is a summary table comparing GMV vs revenue:

Tracking both illuminates a company’s actual net sales relative to the larger consumer spend.

How to Calculate Gross Merchandise Value

Hopefully, it’s clear that GMV is a metric you want to track. But how exactly should you calculate it?

Here are the key steps:

1. Identify the Time Period

GMV reflects total sales within a certain timeframe – for example, daily, monthly, or yearly GMV. Decide which periods you want to track. Monthly or quarterly GMV are most common.

2. Tally Up Total Sales

Add together all sales dollar amounts within the period. Be sure to include:

• Product revenue
• Shipping fees
• Taxes
• Any other charges to customers

Refunds and returns should be excluded.

Keep tax reporting requirements in mind for this total sales value figure. While sales tax collected contributes to GMV, it must later be properly remitted to avoid becoming an accounting and legal obligation.

3. Make Any Necessary Adjustments

You may need to make some adjustments to calculate a true GMV figure:

• Subtract gift card redemptions – these don’t represent new sales
• Remove internal purchases or transfers
• Adjust for multi-channel sales to avoid double-counting
• Remove fraudulent/canceled transactions

Making these adjustments results in an accurate final GMV number.

How to Calculate Revenue

In comparison to GMV, the revenue calculation is a bit more involved:

1. Start with Total Sales

As with GMV, tally up total sales dollars over your chosen period.

2. Subtract Discounts/Refunds

GMV includes discounts, coupons, etc. – but these lower actual revenue. Back these amounts out.

Also, remove any refunds or returns.

3. Deduct Direct Product Costs

Subtract the direct costs involved in selling your products:

• Product manufacturing/purchasing costs
• Inventory storage fees
• Commission fees

4. Subtract Operational Expenses

Deduct other expenses related to operating your e-commerce business:

• Hosting fees
• Payment processing costs
• Marketing spend
• Payroll
• Rent

5. Complete an Adjusted Calculation

As with GMV, account for any changed factors like fraud or cancellations. Make any other adjustments needed to arrive at true net revenue.

This multi-step calculation results in a clear view of net profitability after all costs and expenses.

GMV vs. Revenue: An Example

To really solidify the difference between GMV and revenue, let’s walk through an example.

Imagine you sell 100 widgets at $100 each for a monthly GMV of $10,000.

Here’s how the month shakes out:

• You sold 100 widgets at $100 = $10,000 GMV
• Widget cost = $50 to produce
• Monthly expenses:
  • Rent: $1,000
  • Payroll: $2,000
  • Ads: $500
• Total expenses = $3,500

Now let’s calculate revenue:

• $10,000 GMV
• -$5,000 product cost (100 widgets x $50)
• -$3,500 expenses
• = $1,500 revenue

While GMV was $10k, actual net revenue was only $15,00 after accounting for costs and expenses. This demonstrates why both GMV and revenue deserve close tracking!

Key Takeaways – GMV vs. Revenue

GMV and revenue provide two critical lenses into your e-commerce business’s performance. Some key points to remember:

• GMV measures total sales volume, while revenue reflects profitability.
• GMV includes all dollar amounts from transactions, whereas revenue accounts for costs, refunds, and expenses.
• GMV shows business growth, while revenue highlights net profitability.
• Track both metrics to get a complete picture and make smart decisions!

Now that you’re a pro on GMV vs. revenue, you’re armed to track your e-commerce business’s trajectory better. Both are absolutely vital to monitor.

Rather than picking one, keep close tabs on both GMV and revenue. They work hand-in-hand to illuminate trends, opportunities, and areas for improvement. With the right grasp of these two e-commerce pillars, you have the foundation to scale growth and profits!