The metric that has replaced GMV to measure startup success
GMV, the blue-eyed boy for startups and investors in the ecommerce space, has fallen from grace in the last two years. What has replaced it? Profitability.
In the last few years, Indian ecommerce firms raised almost $11 billion (Rs 73,000 crore) from venture capitalists. What played a key role in these rounds of funding? The Gross Merchandise Volume (GMV).
Flipkart Co-founder Sachin Bansal has repeatedly stated that profitability was neither a top priority nor a focus. And he was not the only one. For a long time, the co-founders of Snapdeal, Stayzilla, and other ecommerce startups were doing exactly the same. Most ecommerce companies prioritised GMV over everything else.
But not anymore.
Investors are no longer looking for pitches about headroom and long-term growth at the expense of short-term discounts. They want cash flow and profitability. The co-founder of one of India’s top three ecommerce firms told a publication that his KRA had “changed from Gross Merchandise Value to profitable orders”.
The difference between GMV and profitability
GMV implies the total value of goods sold by an ecommerce marketplace. Consumer businesses use this metric early on to show growth potential when they’re not making a significant profit.
Profit, on the other hand, is the difference between the amount earned and spent while buying, selling, or producing something, or during operations.
GMV was the blue-eyed boy for startups and investors in the ecommerce space. But it has become a façade for making losses and bleeding funds. Indian ecommerce companies essentially mirrored the West, which used GMV as a metric to charm investors.
But in the last two years, it has fallen from grace.
India has historically been a different market from others. Every organisation that set up shop here adapted to its ways of functioning. And since time immemorial, the marketplace has prioritized rokda, or cash flow. Profit is an integral part of that cash flow.
Check out mom-and-pop stores in your area and you’ll see how many of them invested their profits in opening up more stores. Indian ecommerce companies are now looking to do the same.
Kunal Bahl and Rohit Bansal of Snapdeal recently wrote in an email to their team, “GMV is vanity, profit is sanity.” Stayzilla founder and CEO Yogendra Vasupal echoed these thoughts when he blogged, “I started treasuring GMV, room nights, and other ‘vanity’ metrics instead of the fundamentals of cash flow and working capital.”
How to build a profitable ecommerce company?
With calls for profitability and cash flow getting louder, it’s time ecommerce companies make profit a central idea instead of an afterthought.
Here are three ways to do so:
First, do things that don’t scale
Does this sound like counterintuitive advice? It’s not.
For every ecommerce company that makes it big, there are thousands that fail. This is because all of them tried to scale up too fast. The result? Quality in service deteriorated and orders fell to levels so low that the companies could not sustain.
Before trying to scale, renowned author Tim Ferriss suggests getting your hands dirty by crafting the core experience and providing one-on-one customer service to people. Keep doing this until you figure out the optimal way for every function in your startup to work.
Most startups in India avoid this step because we consider dirtying our hands a low-level task. It’s also why they fail, which shows how wrong people are to avoid ground-level work.
Hire the right people
An organisation is a cluster of people. Organisational culture, according to PayPal founder Peter Thiel, is nothing but what people do each day.
Make time to interview every employee you hire. Check for core values, what drives them, and whether they’ll be a good fit for your company. These people will make or break a company.
Take time to find and hire the right people. This is one of the non-scalable tasks you must pay special attention to. And once you find the right person, as Steve Jobs would say “get out of their way”.
Airbnb Founder Brian Chesky personally interviewed his first 500 employees. It was time-consuming work, and it didn’t help the organisation scale. But he knew that it had to be done.
Build stuff that people want
Let’s face it. Most of us are not Steve Jobs, who knew what people wanted before they knew it themselves. If we were, then no market need would not be the number one reason for startups to fail.
So don’t try to build and sell what you want to. Instead, focus on your target audience. Build stuff that addresses the problems they face. You don’t have to be the first. Google was the 21st search engine in the market. You just have to be really good at execution.
Don’t try to add a whole bunch of features in your product right off the bat either. Remember Facebook in 2007? There was no Like button. There were no Groups, Stories, Videos or features we enjoy today. No bells and whistles. The platform evolved over time.
So get your product and features out there quickly. Collect feedback and go back to the drawing board. Revise your product and repeat the process.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)