Gross Merchandise Value (GMV): Definition, Formula, Pros and Cons, and Example

What Is Gross Merchandise Value (GMV)?

Gross merchandises value (GMV) is the total value of merchandise sold over a given period of time through a customer-to-customer (C2C) exchange site. It is a measure of the growth of the business or use of the site to sell merchandise owned by others.

Gross merchandise value (GMV) is often used to determine the health of an e-commerce site's business because its revenue will be a function of gross merchandise sold and fees charged. It is most useful as a comparative measure over time, such as current quarter value versus previous quarter value.

GMV is also known as gross merchandise volume; both phrases indicate the total monetary value of total sales.

Understanding Gross Merchandise Value (GMV)

The gross merchandise value (GMV) is calculated prior to the deduction of any fees or expenses. It provides information that a retail business can use to measure growth, often on a month-over-month or year-over-year basis. Generally, a retail business can calculate the gross value of all completed sales, though merchandise returns may need to be removed from this number to provide an accurate calculation.

To calculate GMV, simply multiply the number of goods sold by the sales price of the goods. The formula is: GMV = Sales Price of Goods x Number of Goods Sold.

Advantages and Disadvantages of GMV

Advantages

Since retailers may or may not be the producers of the goods they sell, measuring the gross value of all sales provides insight into the company’s performance. This is especially true in the customer-to-customer market, where the retailer serves as a third-party mechanism for connecting buyers and sellers without actually participating as either.

It may also provide value to retailers in the consignment sector, as they never officially purchase their inventory. Even though the items are often housed within a company’s retail location, the business functions as the authorized reseller, often for a fee, of another person’s or entity’s merchandise or property. Generally, they are never the true owner of the items, as the person or entity that placed the item on consignment may return and claim the item if they so choose.

Disadvantages

Although GMV represents the total value of goods sold on a C2C exchange, it doesn't truly reflect the profitability of a company; primarily the true revenue that a company earns from fees. For example, if a company's GMV was $500 for the month, that entire $500 does not go to the company; the majority of it will go to the individual who sold the goods. The company's true revenue would be the fee that it charges for the use of its site. If the fee was 2%, the company's true revenue would then be $500 x 2% = $10.

Depending on the type of e-commerce site, GMV can have other disadvantages. For example, if a company were an online retailer that produced and sold its own goods, GMV would indicate its revenues, but it would only be one metric, providing a limited view. It would not tell you the number of customers visiting the site or how much revenue is from repeat customers, which are important indicators in terms of customer satisfaction and thus the long-term health of the company.

Customer-to-Customer Retailers

Customer-to-customer (C2C) retailers provide a framework, or system, for sellers to list items they have in inventory and for buyers to find items of interest. The retailer functions as an intermediary, facilitating the transaction, commonly for a fee, without actually being a buyer or seller at any point within the transaction.

In many of these customer-to-customer sales, the retailer facilitating the transaction never comes in contact with any of the physical merchandise. Instead, the seller will send the item directly to the buyer once the financial portion of the sale is complete.

This model may differ drastically from other retail models in which the retailer purchases merchandise from producers, manufacturers, or distributors and then essentially functions as an authorized reseller of goods the company has purchased.

Gross Merchandise Value (GMV) vs. Gross Transaction Value (GTV)

While GMV can be defined as the total dollar value of everything sold through a marketplace in a given period of time, gross transaction value (GTV) is a calculation of the revenue in relation to commissions. GTV is used more in businesses that operate on commissions, as GTV is equal to the number of items sold multiplied by the price collected.

It is calculated by multiplying the number of transactions by the average order value by the total number of transactions made and items sold. It tends to be used by e-commerce companies with a marketplace where multiple sellers transact.

Example of GMV

Two of the most well-known C2C sites are eBay and Etsy. Say, during the first quarter of the fiscal year, eBay sold 100 goods. For simplicity's sake, all of those goods were priced at $5. For the first quarter, eBay's GMV would be 100 X $5 = $500.

Now, for example, say that in the same quarter, Etsy sold 80 goods, and again, for simplicity's sake, all of the goods were priced at $4. For the first quarter, Etsy's GMV would be 80 x $4 = $320.

In this example, eBay (EBAY) has a better GMV at $500 than Etsy (ETSY) does at $320. However, this does not tell the whole story. On these sites, a portion of the revenue has to go back to the seller that sold the goods; eBay and Etsy only keep the fees they charge, which is their actual revenue.

In this example, eBay charges a fee of 2%, and so it would bring in $10 ($500 x 2%). Etsy, on the other hand, charges a higher fee: 4% in this example. Etsy would bring in $12.80 ($320 x 4%). In this example, Etsy actually performed better because it brought in higher take-home revenues.

The Bottom Line

Gross merchandise value (GMV) is the total value of goods sold by a customer-to-customer (C2C) exchange site, but the metric is often applied to other types of retailers. Though GMV is a handy metric to calculate as it reports the total value of goods sold, it needs to be taken into consideration with other metrics, particularly for those companies that generate revenue through fees.