In the previous note, we had dived into –
- GMV (Gross Merchandise Volume): GMV represents the collective worth of all products sold on a business platform.
- GTV (Gross Transaction Volume): GTV encompasses the complete financial activity on the platform from start to finish.
- Gross Revenue: Gross Revenue signifies the true income earned by the business.
- Net Revenue: Net Revenue is the income remaining after removing returns and discounts from the gross revenue.
Deeper understanding –
In the realm of business, understanding the metrics of GMV, GTV, gross revenue, and net revenue is crucial. These metrics offer insights into a company’s financial performance, yet they can vary significantly based on factors such as business model and marketing strategies. Let’s explore this through hypothetical examples of Company A and Company B.
Company A: The Telecom Pioneer
Company A is a telecom service provider and when it entered into the market they decided to offer customers free data and call services for a limited period. As the end of the free service period neared, the company extended its offer with modifications, including data usage caps and paid plans after reaching the cap.
They decided to be aggressive with the marketing expenses and gain the customer’s attention. With the free nature of the service, it gave the customers the opportunity to review their service and the customers were satisfied.
Telecom service is not something we window shop for and once we are satisfied with the given service we would like to settle for it. By the time company A had entered the market most of us were settled on previous service providers already and were not willing to experiment much, but the free model attracts most. To an addition to that — word of mouth, people who were using it were satisfied and were sharing their satisfaction among friends and family.
So when the free model was coming to an end, getting replaced by a comparative cheaper than the competitors plan, the consumers of Company A were not leaning towards shifting back to another service provider and decided to stick.
Company B: The Direct- to-Consumer hair care brand
Company B, a D2C , for an attention-grabbing strategy they initially offered a heavily discounted product at Rs 1 with an additional shipping charge of Rs 99. Effective marketing attracted a considerable number of customers to make the purchase.
However, once the discount period ended, the product reverted to its original price of Rs 300.
The consumers B had attracted were those who were willing to experiment with the product but when it jumped back to its original price creating a sudden large difference many consumers refrained from repurchasing and easily switched back to their original choice of the brand .
Interpreting Metrics
Both Company A and Company B are two very different companies and comparable in no vertical.
But through these two companies we can understand how GMV, GTV, gross revenue and net revenue of growing companies should be interpreted for two different extremes.
In Company B’s case, the Gross Merchandise Volume (GMV) surged during the discount period due to high sales volume. The Gross Revenue will be the same as the GMV because the company owned the inventory and shipping charges were directed to partners. However, the Net Revenue, obtained by subtracting the discount from the product price, provided a more accurate representation of actual earnings.
In contrast, Company A, a telecom service provider, provided the service for completely free but the actual cost for the service was Rs 303 per month. With that value we can calculate our GMV and revenue figures.
While the Gross revenue would be the same as the GMV, the Net Revenue figures would sum up to zero for the initial months as the product can be said to have a 100% discount.
While calculating these indicators would be necessary, they won’t be enough to interpret the growth of the business. The only significant number we could have here would be the sales, increase in subscribers and market share of the company.
Understanding Beyond Numbers
Ultimately, while numbers are valuable indicators, true insights come from:
- understanding the context
- market conditions,
- product uniqueness,
- business model, and
- other factors shaping these metrics
Company A’s free telecom service served a larger market including consumers who did not have access to the internet before and solved a larger problem at hand. Service quality led to organic growth, once that was established the company’s growth was fueled more by its current consumers.
And due to the nature of the product to not be easily substituted, the consumers decided to stick with it.
While Company B’s discounted strategy and high marketing , created awareness among the consumers who were now willing to experiment. This led to high GMV but lower net earnings.
Further, due to easy availability of alternatives , the consumers did not decide to stick to the product as the discount was removed and the product now was back to its original price. This caused a drop in the GMV, but the net revenue did not have the same fall as the discounts were now removed and revenue earned per product increased from Rs 1 to 300.
Another reason could be that we often believe that a cheaper product is of cheaper quality. Due to which the customers would have refrained from trusting the quality of the product and re-ordering it.
We can have an understanding of the market share of a company through GMV and the operational efficiency through its Gross/net revenue. But these indicators must be interpreted within a broader context. Their true value is revealed when linked to market dynamics, business models, and the mechanics driving them.
Author:
Meemansa Suri
