Profitability for E-Commerce Startups: GMV vs Unit Economics

Statistics show that there are thousands of new entrepreneurs in India every year, and most of them pertain to the e-commerce market. There’s always been a disagreement on what’s a better metric for the e-commerce industry is, GMV or unit economics? This has been discussed time and again, especially after the devaluation of Flipkart. The over-valuations done in the initial rounds of funding can be attributed to using GMV as a key metric in accessing the business.

What is Gross Merchandise value (GMV)?
GMV essentially signifies the value of goods sold on an online marketplace, but does not take into account factors such as product returns, marketing costs, logistic costs, salaries and discounts. Consequently, it does not present a reliable picture of the company’s health. Online marketplaces charge sellers a commission on the products sold, which account for the revenue. For instance, an iPhone will significantly add to the company’s GMV, but not much to its revenue as commission on phones could be anywhere between 5% and 10%. So an iPhone with a GMV of INR 70,000 could get revenue of between INR 3,500 to INR 7,000, or even lower if there are discounts and none of the phones are returned. GMV was one of the favourite metrics of e-commerce companies used to highlight their explosive growth.

What is Unit economics?
In layman terms, unit economics simply represents difference between how much a company spends to acquire each customer and how much are a customer is worth to the company. If, value of revenue generated by a single user to the company is more than spends by the company to acquire that user, the company has a business. A business model is considered to be manageable only if it is unit economics positive. Start-ups are increasingly focusing on achieving positive unit economics after investors scraped back on investments starting late last year.

Scenario – Irrational sellers, moody customers, and regulations, along with prodigal habits, have made the Indian e-commerce industry burn four to five times the net revenue made per transaction on average. The e-commerce market in India is expected to be more than USD 300 bn by 2030 according to a Goldman Sachs report. Now, every e-commerce company wants to be a part of this future market. Hence, all the major e-tailers are focusing on roping in customers with heavy discounts, aggressive marketing and business promotion.

A startup at a very early stage or even at growth stage has a longer gestation period and hence investors focus on the top line numbers of the company. Once the company falls into mature stage, the focus shifts to the bottom line i.e. profit making or cash generating capacity.

Conclusion- Companies at a mature stage should switch to customer recalling, retention and loyalty as their key metrics, as opposed to an overwhelming focus on GMV earlier. Besides this their focus should also switch towards developing a business that is sustainable and manageable. There are no arguments to undermine the importance of customer acquisition for businesses to improve a company’s market share, but this has to be done by spending in a more responsible way. The focus should not move from customer acquisition to mere increase in GMV numbers.
However, this should just be treated as an additional metric, an outcome of the business operations, and not something to be chased as a business strategy.

Also Read: How to create a Robust Business Plan

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