We all know retention. But that's not enough.
It’s another Sunday and I absolutely love the weekends when I have to send out an edition of my newsletter. It gives me a chance to interact with so many of you through your responses, it’s unreal.
While there’s a LOT of chatter on the economy and a state of correction in the coming months, I thought it was best to address the nip in the air with more constructive solutions. So we dive into a key performance metric here, which would be relevant for absolutely any platform / e-commerce business.
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Now on to the crux.
For those of you who know me, I absolutely love metrics and data. And today, I’m diving into one that I believe has been underrated across the industry. It’s relevant for both e-commerce & consumer-tech businesses. And MOST importantly, marketplaces: GMV Retention.
Before you assume what it is, let's read on.
Starting off with an example:
Imagine you’re running a marketplace or e-commerce business. Lets call it ABCo. You see that the customers you have onboard in Month 1, about 25% of them come back in Month 3. But they’re buying only 50% of what they did in Month 1.
Now say a competitor comes up in about a couple of months; lets call it XYCo. You see a similar trend of their customer retention in Month 3, i.e. 25%. But they continue to spend at 100% of what they did in Month 1.
By a simple calculation, you’d realise that XYCo. has grown 2X in revenue, even with the same set of customers.
The difference between these 2 businesses is one major metric: GMV (Gross Merchandise Value) Retention.
Let's define it better.
What is GMV Retention?
GMV retention is a cohort-based way of looking at how healthy each side of your marketplace is. Or in case of an e-comm business, just your demand side.
Or simply put “It's the % of returning revenue through retained customers on your platform”
Most companies measure user retention, which shows the frequency with which users return to your product or site. Let’s say ten users transact for the first time in January 2022. 5 of them come back and transact in February 2022, and 3 come back in March 2022. Your one-month (“M1”) user retention for this cohort is 50% (5 /10 initial users), while your M2 user retention is 30%.
GMV retention takes this a step further by measuring how much of each cohort’s spend you retain over time. Say those ten users spend INR 10,000 on the platform in January, and the five that come back in February spend INR 7,500. Your M1 user retention may only be 50% – but your M1 GMV retention is 75%. (INR 7,500 / INR 10,000).
HERE’s an excel sheet that would help you better understand what GMV Retention looks like.
More on GMV Retention:
For Marketplaces: GMV retention can range from 0% to 100% for each side of your marketplace. Usually in case of low volume marketplaces (like Make My Trip or online pharmacies), demand side GMV retention will be much lower than the supply side GMV retention. What this means is the number of users buying products repeatedly on the platform will be lower than the number of sellers who can retain their sales goals each month.
Whereas in a high volume marketplace (like Ola or Zomato), both demand and supply side GMV retention can be as high. Both customers are retaining their expenses on the platform while the sellers are equally selling a higher number of products every month.
For E-Commerce: Here you will only have the demand side of GMV retention. But this is still an important metric beyond straight line customer retention.
It is GMV Retention that gives you more specific value and understanding of your performance as a platform.
Let's see how.
- It’s an indicator of product-market fit. High GMV retention can reflect one of two things: (a) most of your users retain and continue to transact over time; or (b) only some of your users are retaining, but they’re transacting much more on the platform over time. Either of these scenarios is pretty positive when it comes to product-market fit, showing that a substantial percentage of users are finding value from your product.
- Growth Prospects : If you can identify levers that make your existing set of customers (demand or supply side) transact more on the platform, you have to worry less about acquiring more users. A healthier GMV retention is always more helpful (and concentrated) than a diluted % of new customers you spend on acquiring every month. On the flip side, a lower GMV retention means that your current set of users aren't really sticking to your product and a new set of users are coming in, which isn't the most healthy position to be in.
- Higher room to build ‘brand’ : A higher GMV retention % means that your LTV/CAC ratios are also high. This means you can spend more time on brand building instead of constantly having to acquire new customers.
- Your GMV retention will always be a key yardstick for investors to pick on, versus your competitors. A healthy GMV Retention % is a sign of a healthy product market fit.
- The performance of GMV Retention over time is a key component to drive growth efforts in a company. If your M6 retention is as high as your M1 retention, your efforts would be focussed on testing and expanding into new markets since the current markets are performing stably. Whereas if your M6 retention is negligible compared to your M1 retention, it means you have to spend substantial effort in acquiring new customers every few months.
- GMV Retention will open up cracks in your product, enough for you to get feedback from your customers. It would help build loyalty programs, better first sale experiences and overall improve the effectiveness of your product vs your competitors.
- GMV Retention is a leading indicator of real success. Unlike top line revenue, this isn't a pseudo indicator of success. As much as your top line may portray a healthy picture, GMV retention will explain: profitability, monthly burn, churn, product gaps or even a future roadmap. It is a deep rooted metric which helps businesses understand the fundamentals of their model.
Well, that’s it for me today. This was the shortest edition on my list and I wanted to see how these perform. Until next time,