What you need to know about Gross Merchandise Value

Gross Merchandise Value (GMV) is defined as the gross sales revenue generated over a period of time by an e-commerce platform before any deduction for fees or commission . It is used to track the growth rate of an e-commerce business since it measures the value of the total merchandise that has been sold through the site for a specific time period, quarterly, bi-annually, or annually.

Gross Merchandise Value = Number of Goods sold x Price of goods sold

This metric is useful for e-commerce businesses that buy and store the merchandise from suppliers and delivers to customers when purchases are made. However, it cannot be used as a standalone metric for all online retail platforms. For e-commerce sites that operate as a Customer-to-Customer (C2C) business, they do not physically manage the goods. The total commissions generated and accrued expenses, such as delivery fees, advertising, return expenses incurred are more important to track for this business model. This is also known as Gross Transaction Value (GTV). GMV is the total marketplace value that the e-commerce site has created whereas GTV is the revenue that the business generated for itself from running the marketplace. For example, GMV may increase from quarter to quarter for an e-commerce business, but if GTV remained constant or fell as a proportion to GMV, it means that the business is not really extracting more value from the transactions that take place on its platform. GTV/GMV is a metric that is preferred over GMV because the stakeholders of the business can analyze the earnings that e-commerce business is generating from hosting customer-to-customer transactions on its site.

Amazon and Alibaba illustrate two types of e-commerce business models and how GMV would differ for the two. Amazon is essentially a reseller, procuring and storing products and then delivering to customers. The company owns numerous warehouses and now has forayed into offline retail, with its acquisition of Whole Foods. The main sources of revenue for Amazon is from sales of electronic products and its member subscription services. It also generates revenue from facilitating third-party sales. Unlike Amazon, Alibaba does not own any warehouses and enables all sellers to directly connect and ship to customers. The commonality between the services are that they have their own payment structures and have dominated their respective home countries. Tracking GMV for Amazon and tracking GTV for Alibaba is the logical route.

To put things in perspective, in 2018, Alibaba's GMV was around $768 billion while Amazon's GMV was $239 billion. GTVs of the companies are not given but it can be deduced that the GTV of Amazon would be higher than that of GTV of Alibaba given their respective business models.

Infographic by : www.channeladvisor.com

Despite Amazon charging its sellers higher fees and commissions, “the company’s profit margin (net income as a percentage of sales) is lower at 4.1% (as of 2019) versus 23.3% (fiscal 2019 ending March) for Alibaba .” This is primarily because of Amazon’s reseller business model which incurs higher overheads than Alibaba. It looks like Alibaba will certainly give Amazon a run for its money however Amazon has been differentiating itself by diversifying in its offerings and focusing on customer service through quality and quick delivery.

In conclusion, while GMV serves as a popular and useful metric to gauge the growth of e-commerce platforms, it is important to understand the type of business model the platform operates on and use it with other metrics to analyze growth opportunities and challenges the business site is facing or may face.

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