Gross Merchandise Value

Gross merchandise value or GMV is the total value of the products sold, usually by E-commerce businesses and online retailers, over a certain duration. This metric is an indicator of a company’s growth and gives an idea of its performance over time. Moreover, it helps determine a business’s health.

Businesses calculate GMV before deducting the fees and expenses associated with selling their products. Typically, expenses include discounts, cost of delivery, marketing costs, returns, etc. This metric is most useful when businesses utilize it as a comparative measure between different durations. For instance, companies can compare the value of the products sold in the current and previous quarters.

Key Takeaways                                                               

• The gross merchandise value definition refers to the total value of the products sold by businesses during a set timeframe. Usually, E-commerce businesses and online retailers use this metric to get an idea of their growth over time.
• Considering GMV is not enough to get an idea of a business’s health and growth as it does not consider various aspects like costs and profitability.
• GMV and revenue are not the same; the latter is a part of the former.
• One must not consider fees and expenses like shipping charges and advertising costs when calculating business gross merchandise value.

The gross merchandise value definition refers to the overall value of the goods sold by a company over a particular period. Usually, businesses compute it every quarter or year. Its use is most common in the e-commerce industry.

This financial metric enables businesses to compare the sales figures recorded over different periods. Also known as gross merchandise value, GMV helps organizations quantify their growth from a sales standpoint.

Usually, e-commerce businesses use GMV and other key financial metrics to assess growth and operations. In other words, organizations do not solely rely on GMV to assess their health and performance. This is because this metric only indicates how much the business is growing. It does not reveal whether the company is generating any profit from the real value of its products sold.

For instance, if an organization’s main growth metric is GMV, it may focus on offering more high-value products as the price can boost its overall transaction value. Nevertheless, the margins on such big-ticket offerings could be lower than on cheaper products. Therefore, this financial metric is not necessarily a correct representation of an e-commerce business’s performance. It cannot help determine if the company is selling too little or too many products as it does not consider its margin.

Individuals can use the following formula for gross merchandise value calculation:

GMV = Product Price x Sales Volume

Let us look at this gross merchandise value example to understand the concept better.

Suppose GoodShoes, a footwear manufacturing company, sold 20,000 shoes in the financial year 2022. To keep it simple, let us consider that the price of every product is $50.

Using the formula, one can compute GoodShoes’s GMV for FY 2022.

GMV = $50 x 20,000, i.e., $10,00,000

Individuals new to the business world often have confusion regarding revenue and GMV. Not knowing the key differences between the two concepts can cause one to take incorrect business decisions. Moreover, it will impact a company’s chances of raising funds from venture capitalists or angel investors. So, let us look at the distinct characteristics of these two financial metrics to understand the difference.

Let us look at the benefits and limitations of gross merchandise value for business:

Advantages

• This metric can help compare a company’s performance in two different periods from the sales standpoint. It can also indicate if a business has grown and by what percentage.  
• It allows e-commerce businesses to compare their performance with their peers.
• The gross merchandise calculation process is quick and straightforward.

Disadvantages

• GMV considers only the sales volume and the cost to customers. Hence, it does not reflect profitability. Businesses must also factor in the business costs, like the cost of delivery, marketing expenses, etc., to know whether they are profitable.
• This metric does not express the true value of the products as it does not factor in the production costs.

Lastly, GMV does not give a clear picture of a business’s health as it does not consider various factors, such as the following:

• Marketing or advertising costs.
• Revenue generated from repeat buyers.
• The total number of website visitors.
• Production costs.