Lets demystify GMV
GMV and its cousins are all topline metrics
If I were to ask you to look at an annual report of a listed company or one of those quarterly investor presentations, what are you going to see in the first couple of pages or slides? In most likelihood, you will see pages full of infographic charts describing key numbers of the businesses. These are the numbers that you will recollect the company with, that you will use to assess the relative position of this company in the market vis-à-vis its competitors, and that you are likely to use in pointing to the company – that company with $5B in Loan Assets, for example or that company with $1B+ in revenue.
Startups are no exception to these kind of topline metrics; We have taken the liberty of define them aplenty and use or abuse them the way we want. Gross Merchandise Value (GMV) is the most common of all.
Okay, what is GMV?
Back when startups were not cool - the later half of 90s, & before the dotcom boom, Amazon was a budding tech company that pioneered selling of books and eventually, other things, online. The community started talking about Amazon in perspective of GMV, which implies the gross value of all the merchandise sold through the Amazon platform in a given period of time.
Why not call it revenue? The answer is growth mindset.
Revenue automatically warrants talking about cost of revenue, and among other things, margins. For a high growth company Amazon, growth was more important, they wanted to talk about the power of the platform in terms of the value it was processing, albeit on the back of lower prices for creating a customer habit which would materialise into customer obsession and long term cashflows. We all know what that turned out to be.
Read this revolutionary letter from Jeff Bezos, founder of Amazon, to Amazon shareholders in 1997, in which he talks about customer obsession and long-term outlook. Despite being more than 2 decades old of wisdom, what Bezos wrote here continues to be so relevant even today. GMV is written as Sales here as it was, and is still, not a GAAP term.
GMV essentially tells you the power of the (eCommerce) platform and the technology behind it and over years has become the most used topline metric in the world of startups.
Some common uses of GMV in the startup world
To show the value of goods sold on the platform by an eCommerce company
To show total value of bookings made on the platform by a hotel booking or flight booking company
To show the total value of appointments made on the platform by a healthcare or services company
To show the total value of transactions processed through the platform by a payments platform
To the show the total loans disbursed through the platform by a lending company
Cousins and close siblings of GMV
Over time, GMV has become a loosely used first-order topline metric used by every other startup, despite its industry - as you can see above. These startups are not selling merchandise (as in “M” in GMV) but are still using or are accepted to use, GMV. I have seen the same in many decks over the years and everyone understands & accepts the norm.
This is particularly interesting to note because there is a trend here. In many markets including India, eCommerce has bought the first wave of consumers online - driving trust, making them experience convenience, experiencing larger choices via large catalogues, and cheaper prices. Flipkart did that in India in the first half of the 2010-decade. It is this consumer behaviour that other sectors build upon, and GMV - the eCommerce way of demonstrating platform power, thus, sticks on.
If you want, you can replace GMV with its cousins and be more sharper in your communication with the investors and the outside world. In that case, let me introduces you to the cousins and close siblings of GMV that are smarter to use, at least in my opinion.
Gross Booking Value (GBV) if you are hotel or flight booking or healthcare appointments company
Gross Transactions Value (GTV) if you are a payment company
Gross Disbursements Value (GDV) if you are lending company
Also, GMV also works. People understand it is the same thing as long as you do. For ease of explanation, I will be using GMV in this article and it shall me the entire group of cousins and siblings.
When GMV is revenue and when it is not.
This is actually the most important section of this post. As GMV has become the most talked about topline (vanity) metric, many startups have confused the same with their Revenue and this is where smart investors have warranted peeling of the layers that make the GMV.
In the case of eCommerce, when you are buying the inventory and then selling the same after holding it, then GMV is indeed your revenue - the invoice to the customer reads in the name of your company. This would be true of a D2C brands such as Mamaearth.
Now, when you are just a platform where other sellers can sell what they want to sell and you are just facilitating the transaction (marketplace), then GMV is not your revenue. This would be true in the case of eBay or Etsy or even Instagram which now a days has become a fashion commerce destination. The revenue will be the commission (say 5% or 10% of GMV, for example) you will charge in facilitating that transaction.
Amazon and Flipkart are hybrid platforms. They own inventory through their own controlled / operated seller arms. For example, CloudTail and WS Retail, in case of Amazon India and Flipkart respectively. They also allow sellers to come and sell on their platform. So the revenue shall be, ideally, GMV from owned inventory plus x% commission from marketplace inventory.
I will reiterate that these metrics are never GAAP. You will never see these exact calculation in their fillings and you will be completely shocked how the revenues are computed there, courtesy tax and legal structuring. But, for sure, use these metrics to understand the quality of growth of the company.
Another example, I can take is that of a AirBnB and Marriott Hotels to explain this. GBV in case of AirBnB will not be revenue as AirBnB is a pure marketplace while Marriott Hotels own the inventory of the rooms and when they do a booking, it is pure revenue for them. That has actually been the power of technology and AirBnB platform to become a large hospitality company without having to build inventory brick by brick.
Marriott Hotels have now started home rentals to take on AirBnB head on and I am pretty sure the GBV from this line of business for them will not be revenue unless there is a different sort of legal structuring. That is why GBV is a good blanket (growth finance) term to assess the relative strength of both platforms; it allows you to benchmark. And if you want to go deeper, understanding how GBV translates into revenue would be your next order of investigation.
Taking more examples, payment companies like RazorPay, GTV is not revenue as the transactions are completely pass through. Food marketplace such as Swiggy, which has started to list their own kitchens on the platform as well, may count the business of those kitchens are revenue and from other marketplace kitchens as not. Gross Bookings on Uber or Ola are not revenues as they don`t own/lease the cars, the drivers are neither employees of the company and are just partners. Thus, revenue for Ola or Uber should be commission from the booking.
Make no mistake, there is a lot of complex legal structures behind these companies that could allow them to use GMV as revenue - its about what is accepted in accounting principles. I actually do not have the right expertise to comment on that. But in principle, I hope this helps you understand the construct.
In my next post, I will be covering GMV a level deeper. Answering questions such as How do you go from Gross to Net (Net GMV) and what is its significance? How do people abuse GMV? And How to peel layers of GMV through some examples.
I will also be available on Sat 12p to 1p to answer any questions you have on this post. You can add this to your calendar. Do comment below so I have your questions in advance for Saturday.
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