Marketplaces are everywhere these days. Some are easy to spot (Ebay, Airbnb) and others look more like products than marketplaces (Uber, Amazon). A marketplace is simply a place that connects buyers and sellers. Instead of making money from selling things directly, a marketplace makes a small transaction fee on every sale between a buyer and a seller.
It’s a great type of business when you reach high volumes of sales, but a bad business if your volume is small. The fewer the transactions, the less money you can make. For this reason, many marketplaces use their Gross Market Value (GMV) as a key metric. GMV is simply the total value of all goods or services sold in the marketplace in a given period of time.
Wait, it’s that simple?
Yes, but just because it’s simple to calculate does not mean it’s simple to understand or simple to use. As a smart, data driven person you immediately realize the GMV has some key flaws. Let’s jump into a quick analysis.
- GMV is an overall total, combining both high-volume / low price transactions and low-volume / high price transactions. Your GMV goes up if a lot of low priced items are sold or if a few high priced items are sold, both of which are useful measures of growth.
- It’s easy to compare two marketplaces based on GMV even if they sell vastly different products at different prices at different volumes.
- GMV is based on gross, which is dangerous. If your margins are small, or negative, the value of GMV may vastly overstate the size of your business.
- Speaking of margins, GMV does not penalize spending to generate more volume. Since it disregards margins, you can run negative margins and grow your GMV quickly at the cost of a viable business model.
- Used on its own, GMV can be misleading as it is not a robust statistic. It needs to be combined with measures of central tendency and other statistics.
Personally, I prefer Net Market Value, which is the total net value of all goods or services sold, as the Gross can be misleading depending on your margins (which we’ve discussed previously). Still, understanding the total size of your marketplace, which is what GMV provides, is critical to understanding your performance.
Quote of the Day: “Advertising is legalized lying.” ― H.G. Wells