In business, it’s essential to have specific benchmarks and measuring tools in place to keep the company on track. In retail and ecommerce environments, the most crucial medium-term metric is the Gross Merchandise Value.
It determines the health of business over a certain period. We’ve done an in-depth study of what it can do for growing marketplaces.
What is GMV?
Gross Merchandise Value (GMV) is the sum of all merchandise sold through customer-to-customer (C2C) marketplaces. It’s usually used in ecommerce trading to measure the health of the business. Total company sales are calculated over a specified time, typically quarterly or annually.
The calculations are made before business expenses, such as advertising, delivery costs, and discounts, are deducted. The primary function of GMV is to allow management to compare the company’s financial metrics between periods. This data helps the organization understand and quantify the growth of the business in terms of sales.
How Does GMV Work in a SaaS Environment?
One of the critical dimensions of a successful SaaS company is revenue and profit breathing. This section includes revenues, cash, and the margins incorporated within the business model. GMV is one of the metrics used to steer the goals of any emerging tech startup.
GMV is the overall revenue coming into the company, but it has to be reviewed alongside net sales, which is income after deductions. SaaS enabled marketplaces usually report earnings in terms of annual or monthly recurring revenues.
The easiest way to calculate GMV is for the ecommerce seller to take the sales price charged to the customer and multiply it by the number of units sold.
To get a better idea of how to calculate GMV, we look at a couple of examples.
Formula: GMV = Sales price x Units Sold.
- If you sell ten spoons on your online store at $10 each, your GMV will amount to $100.
- If you’re selling digital service products on a monthly renewal fee, the base calculation will be the same. Twenty digital products at $20 will come to $400 GMV. The difference is that, in theory, the figure should increase per month as more people sign-up. The data can be used as a base for ARR and MRR metrics for SaaS.
Disadvantages of GMV
If you take the above calculation within the context of an ecommerce store, the figure refers to the total amount of dollar sales in a given economic period. However, this is a flawed measurement as it doesn’t consider other pertinent factors.
If you’re trying to determine a company’s economic standing, the GMV figure will not give you enough insight. An essential factor to take into consideration is the number of customers visiting the store. Along with that, you must take note of the number of repeat purchases these customers make, and the average value of each order.
These figures are critical and need to be used in conjunction with the actual GMV figure. It helps you determine whom to target when planning your SaaS marketing strategy.
The road to success for tech startups is a bumpy one. It isn’t easy to know what business measuring tools to use to get an accurate indication of its health. GMV is a useful resource in getting a general overview of where the company stands in terms of revenue, but can’t be used without other data inputs.
It’s essential to understand how your customer behaves within the context of the revenue figures. If you know how clients act, it makes formulating a marketing strategy more straightforward. To keep abreast of the latest software business information, let’s connect and talk more about the SaaS World; sign up for our newsletter.