If you’re here to learn about gross merchandise value vs revenue, you’re in the right place! We’ve put this post together to explain exactly that. Plus, we’ll give you examples and the formula to calculate it!
Let’s dive in!
What is Gross Merchandise Value (GMV)?
Gross Merchandise Value is also referred to as gross merchandise volume. Known as GMV for short, this is the total value of all you’ve sold. It’s the sum, for example, of all the orders made and paid at your eCommerce store.
Usually, a specific period of time is set for the GMV calculation. This is because the actual value changes every time you sell something. Yearly and quarterly calculations are the most common. When you calculate GMV, you need to use the raw numbers, before you deduct accrued expenses. These are your product discounts and promotions, advertising and marketing costs, order shipping and delivery costs, and order returns.
GMV is a vital key performance indicator (KPI). This is because the general gauge of whether your business is doing well is how much you’re selling. So, people in eCommerce often track this diligently.
Importance of Gross Merchandise Value
GMV measures the volume of goods sold; in other words, how many sales transactions your business processed. As such, GMV gives you a good idea of your business’s overall health. It can also show you a rough trend for your growth, up or down based on how many sales you made month to month. When you look at GMV like this, as a comparative measure over time, it can be very useful.
That said, we do not recommend using GMV as your only assessment tool. It’s more like a quick estimate. This metric gives you unrefined data because you use the gross volume – associated costs and expenses are not included. The calculation does not accurately represent your actual net income. So, it won’t show you the real numbers of the merchandise you sold. It is therefore ineffective at gauging business profitability when used on its own.
You need side-by-side calculations of actual revenue and sales data. In combination, they can give you a better picture of how healthy your company is in terms of operations and growth.
For instance, you can see how much you’re actually selling, then look at how much is “lost” due to returns and refunds. You can also calculate the proportion of revenue you pour into advertising, and how effective your campaigns are. With other financial metrics, your gross merchandise value can give you accurate details. Then you can measure your business’s health and potential for growth, helping you make better decisions.
How to Calculate Gross Merchandise Value
Getting the GMV metric is a simple calculation. You just multiply your total number of orders by your average order value (AOV). This means that you need to calculate those, though.
First, determine what time period you are going to make the GMV calculation for. Then, to get the Total Number of Transactions, just look at the total number of orders that you got and processed during that given period.
Your Average Order Value is how much, on average, each order made at your store is worth. To calculate this monetary value per transaction, you need to know your total revenue. Then, divide that number by the total number of orders or transactions:
Average Order Value = Total Order Value ÷ Total Number of Orders
Now you can calculate your GMV using this formula:
GMV = Total Number of Orders X Average Order Value.
Alternatively, you can calculate GMV using the sale price of goods instead of the average order value. This gives you a more exact GMV.
Difference between GMV and Net Sales
We calculate GMV using gross numbers, or before deducting costs and expenses. Net sales, on the other hand, considers all these deductions before making a calculation. Net sales therefore gives you a more accurate number, but takes more time to figure out.
Gross Merchandise Value Example Calculations
GMV is often used by C2C sites, or online marketplaces like Amazon. For our example, though, we will stick to the eCommerce business model.
Let’s say you made sales on 3 products this month:
- Product A = $10. Orders made = 10. Total order value = 10 x 10 = $100
- Product B = $15. Orders made = 20. Total order value = 15 x 20 = $300
- Product C = $20. Orders made = 30. Total order value = 20 x 30 = $600
So, you calculate:
- Total Number of Orders = 10 + 20 + 30 = 60
- Total Order Value = 100 + 300 = 600 = 1000
- Average Order Value = 1000 ÷ 60 = 16.67
Say you wanted to calculate your GMV for the quarter. You would simply add up the number of orders made for each month and calculate based on that.
How to Increase Gross Merchandise Value
First, we should know what GMV growth rate range is healthy. GMV is a raw metric that mostly helps you quickly measure the growth of your business.
For business growth, the ideal rates can vary based on type, industry, and age or stage. The basic rate considered good, all else being equal, is 15-25% every year. Mostly, you should consider what is sustainable for your company specifically. If you go for a higher number than you can manage, it can lead to overwhelm. A growth rate that’s too fast can kill a business, especially if it’s fairly new.
With that in mind, you can use the following strategies to increase your GMV.
Offer Free Shipping
Free shipping is an expectation these days rather than a bonus. Most customers are ok, however, with meeting a certain order value to get free shipping. They know that this is better than paying higher prices for each product so that shipping can be free.
If free shipping means that customers buy additional items, you still come out on top. Just make sure you are calculating properly to get the order value you need to make up for the shipping costs. That way, you are not hurting your net revenue as you improve your GMV. That would be counterproductive.
Upsell and Cross Sell Products
Upselling and cross selling are both great ways to encourage customers to increase their order value. Most of the time, all you have to do is show them a small change they can make to their selection or shopping cart. The point is to show them very clearly what advantage they get from making that small change.
One way to upsell is to show variations with slightly higher prices, emphasizing their amazing features. One way to cross sell is to add that all-time-favorite “frequently bought with” section to your product pages and shopping cart page. This can consist of related products or accessories. Just make sure that these additions obviously make the product they are buying more amazing.
When you upsell and cross sell, you can make the deal more attractive by showing how much they can save. Even with an upsell, you can show them a special deal only available to them for a limited time. The discount is often enough to encourage the bigger purchase.
Add Bundles
Bundles are another way to increase your order value by offering lower costs or prices. Either they get free shipping or a bulk discount. Most often, all you need to do is show these bulk options and the discounts they come with. They usually sell themselves.
Bundles are a great way to move mismatched inventory, too. Let’s say you got left with a bunch of t-shirts in seven different colors. Because you also sell them individually, the counts are too different to do up new bundles of five. Instead, you could put together “random” bundles at a bigger discount than the color packs. Or, bundle together the same colors, maybe in different sizes, and call it a family pack. There are so many options!
Offer Bulk Discounts
Bulk discounts are like discounted bundles, but bigger. This can be like wholesale pricing without being technically wholesale. You just create bigger packs. Alternatively, you could sell subscriptions that qualify for bulk discounts if they pay up front. You can also put the savings on the back end, like it gets cheaper each time they order up to a certain point.
Provide Top-Notch Customer Service
Offering the best quality customer service you can will always make customers want to shop with you. There’s no substitute for serving well, and they know it. Happy customers who get their questions answered and feel cared for often refer you to friends. Their repeat business plus their referrals can do wonders for your GMV.
What Is EcomBalance?
EcomBalance is a monthly bookkeeping service specialized for eCommerce companies selling on Amazon, Shopify, Ebay, Etsy, WooCommerce, & other eCommerce channels.
We take monthly bookkeeping off your plate and deliver you your financial statements by the 15th or 20th of each month.
You’ll have your Profit and Loss Statement, Balance Sheet, and Cash Flow Statement ready for analysis each month so you and your business partners can make better business decisions.
Interested in learning more? Schedule a call with our CEO, Nathan Hirsch.
And here’s some free resources:
- Monthly Finance Meeting Agenda
- 9 Steps to Master Your Ecommerce Bookkeeping Checklist
- The Ultimate Guide on Finding an Ecommerce Virtual Bookkeeping Service
- What Is a Profit and Loss Statement?
- How to Read & Interpret a Cash Flow Statement
- How to Read a Balance Sheet & Truly Understand It
Conclusion
GMV is a good metric to track for any eCommerce business or C2C exchange site. When you can make this quick calculation at any point, you can see how things are going overall. Just remember that GMV is a very raw number. If you have a lot of costs and expenses, you need to go deeper to do a real business health check.
