How to go from Gross to Net GMV

It broadly applies to all kinds of top-line metrics

In my last post, I introduced the concept of GMV and most importantly when it is revenue and when it is not. You can read the post here if you had missed it.

By now I hope you understand that GMV allows you to measure the power of your platform - goods sold, bookings done, transactions processed, for example, in a given period of time. I would like to bring your attention to why its not enough because the ‘Gross’ in GMV has very little standardisation. Consequently, people include many other things including cancellations, returns, and discounts.

This makes the understanding of Net GMV important; or NMV, Net Merchandising Value, or NBV or NTV, pick what name you like. One can go from Gross to Net GMV by subtracting cancellation, returns, discounts and other things which we will talk about subsequently.

GMV could include cancellations and/or returns

How many times have you gone online to book/buy something and cancelled it later? Quite a few times, I am sure. Some startups could include this in GMV to bloat up numbers which is not correct in my opinion. And sometimes cancellations are right to be included in GMV. It is not that straightforward.

I have a thumb rule for this. Include cancellations in GMV only when invoice is generated to the end customer. I will explain with two examples

(1) Cancelled eCommerce orders after dispatch , because typically invoice is created when dispatch is triggered. Anyway, in eCommerce, they are defined as returns. It is important to note this because once an order is cancelled (returned) post dispatch, supply chain cost is incurred to bring it back to company warehouse. It is also a reason why returns should be part of GMV.

(2) Cancelled travel and flight bookings, because invoice is generated as soon as you book something and customers are charged hefty cancellation fees should they change their mind. This is only because the nature of this industry is that of dynamic pricing and not because the platforms will incur charges to cancel the supposed travel 90 days later. These platforms just dont want you to be snooping around for a cheaper ticket once you have made a booking.

Similarly, cancellations should not be included if invoice is not generated. Let me take a few more examples to explain this

(1) Cancellations on eCommerce website before dispatch.

(2) Cancelled cab bookings because invoice is generated after trip is completed

(3) Cancelled transaction by a payment gateway provider (they are called failed transactions, typically)

By now, I hope you can see that there is lot of grey-area here to argue why one could/should include cancellations in GMV and vice-versa. Also, you are not wrong to feel confused; that is exactly why you have Net GMV. By all means, subtract cancellations and look at Net GMV. When we as investors compare companies we always bake into account the structure of the business and consequently understand what GMV is composed of, and of course, how does it translate to Net GMV, if and when required.

GMV could include discounts

How many times have you been lured to an internet platform / mobile application through a lucrative discount offer. Many a times, right? Some startups include discounts in GMV and have a big fat line item below GMV called discounts. For example, say the maximum retail price of an iPhone is $1,000 but on some eCommerce marketplace it is listed at 50% discount i.e. $500. After selling 10 such iPhones in a month, this startup could consider GMV as $10,000 and thus shall have a discounts line item, below GMV, at $5,000.

This would also be true for an app like Swiggy where we often apply discount coupons during checkouts. Swiggy could include GMV at pre-checkout prices (list prices or rack rates) and include discounts later. I have not looked at Swiggy numbers and hence I said “could.”

By now, you already know that I am not a fan on this. Because, I think inherently the purpose of a top-line metric is, as I have said before, to show the power of your platform. And price is a big factor in doing that; if customers are transacting at discounted prices, then GMV should be at those prices.

There are, however, some people who argue measuring GMV at MRP, especially in case of D2C brands where GMV is revenue. Their reasoning is that discount is merely a marketing lever and will go down as percentage of GMV/Revenue with time and they would like to actively track it.

Like I said, there are no right and wrong solutions. The purpose of this post is to arm you with the right tools so you can use any approach you like and you can peel off layers to GMV, when required i.e. use Net GMV.

GMV could include taxes

When GMV is indeed revenue you will have the need to separate out the tax element to get to Net GMV. This one is honestly very complicated for us, the non finance folks, to worry about. There could again be lot of structural and legal level complications which would impact what kind of taxes and at what rates should be part of the GMV for a particular business. At this point it is important to know that getting to Net from Gross could require separating the GST (tax) element.

A complex business could have many other things included in Gross GMV but I think it is for basic understanding what we discussed is enough.

GMV is abused a whole lot, and that is why you need Net

I have been in the industry for 8+ years now and I have seen the good, the bad, and the ugly. Thanks for my past employer Flipkart, which always promoted looking at the right metrics, I have never been a fan of over reporting or abusing numbers. The culture of always doing the right things was prevalent across Flipkart and is deeply embedded into how I think and approach growth finance.

In early days of eCommerce, some of our competitors were reporting GMV on list price while we were always reporting on FSP (Flipkart Selling Price, which was net of discounts). The GMV also included cancellations before dispatch in some case. One of our competitor was selling apartments, as an advertisement banner, on its platform and was conveniently including the actual price of the apartments in GMV, vs the commission they would be getting by just getting customers to sign up for apartments visits. How does one even sell an apartment online, I wonder.

I still see many startups conveniently using GMV to show big numbers and not actively talking about what real numbers are. For example, the Gross to Net drop could be as high as 50%, and among other things, the real revenue could be just 1% of GMV - it could just be a low commission business.

I think only startups should not be blamed. VCs (including me) crave for high growth numbers and are often putting pressure on the ecosystem to focus on top-line and vanity number, often at the expense of real numbers. It is a bad practice and at the end real numbers - revenue, margins, profit, and cashflows - will be needed and every startup will have to justify their hefty valuations in the context of these numbers. Those who can`t will die abrupt deaths because someone down the line will be asking tough questions. Take the eCommerce example, we all know who survived to give a real fight to Amazon and who all went under.

Doing the right thing always wins in long term which includes looking at your numbers the correct way. It is not just to talk to investors but also about what kind of internal culture prevails in a startup. We at Sparrow Capital derive a lot of inference on this while making our investment decisions. It tells us a lot about the mindset of the founding team. I think we can all agree, that mindset is a very important thing in making of a company.

Final thoughts and what is next

I hope this letter gives you some framework to think about GMV and Net GMV. If required, we can all get on a zoom call to discuss this in detail. Please feel free to comment if you would like that. You can also join our community on Qoohoo to get an early access to what I am writing next and ask me questions more impromptu. Please open the below link in mobile browser.

What I would like to cover next is about other top-line metrics that are important beyond GMV specially those that become sectors / business specific. Or, maybe a small numerical case study on GMV. Or, maybe both. But I really want to hear from you, if you what would be important for you. So, comment below, or tell me the same on Qoohoo.

Talk to you soon!