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Reuters/Damir Sagolj
Make way for profitability.
WHAT'S IN A NUMBER?

The metric that Indian startups once swore by is now being blamed for all the sector’s ills

By Itika Sharma Punit

Till a few years ago, profitability received the step-child treatment from Indian e-commerce entrepreneurs.

From 2013 to 2015, any probing on this metric would inevitably evoke sniggers and lectures from founders on how online retail was not about making money too soon, but about increasing the market share. On several occasions, the industry’s posterboy and co-founder of Flipkart, Sachin Bansal, proclaimed that profitability was neither the top priority nor a focus.

Three years on, things are very different.

Profitability has assumed great importance. Flipkart’s fashion arm Myntra has repeatedly told the media that it is looking to turn profitable by March 2018. If anything, other online players like Ola and Pepperfry, too, have set deadlines for this.

And in the meantime, a metric that was the darling of Indian consumer internet companies till recently has seen a drastic fall from grace.

For almost a decade, gross merchandise value, or GMV, was the buzzword as tech startups gained popularity. It was bandied about as a symbol of success and a proxy for revenue.

Privately-held startups, not obliged to publicly disclose their balance sheets, flaunted GMV numbers to describe their size and success. Flipkart and Snapdeal, among others, competed for GMV-supremacy, sharing ambitious targets.

GMV is often confused with revenue, though it is anything but that. For beginners, GMV is the total value of goods sold through a marketplace. The metric is used to value online consumer businesses in their early years when they aren’t making any substantial revenue or profit.

GMV = sale price charged per item X number of items sold

Revenue is the (small) commission they earn on the sale of that item.

In short, it is a convenient metric used to window-dress even a loss-making, low-revenue business. Around mid-2016, though, it began losing its charm.

Last week, GMV finally turned into the full-fledged villain.

On Feb. 22, Snapdeal co-founders Bahl and Rohit Bansal wrote an email to their team admitting the mistakes they had committed in running the company. “Let’s remember—GMV is vanity, profit is sanity,” the duo said in the email.

On Feb. 23, when home-stay aggregator Stayzilla announced its decision to suspend operations, GMV was again blamed. “In the last three-four years, though, I can honestly state that somewhere I lost my path. I started treasuring GMV, room-nights, and other ‘vanity’ metrics instead of the fundamentals of cash flow and working capital,” Stayzilla co-founder and CEO Yogendra Vasupal wrote in a blog post.

The rise and fall

Flush with funds in 2014-15, Indian internet businesses pampered customers with deep discounts, often subsidising buyers from their own pockets. It was a convenient arrangement for these cash-rich companies: bigger discounts led to more transactions, translating to higher GMV figures that could be flaunted before investors and the media.

But as funding began drying up in 2016, discounts became unaffordable and GMV growth harder to come by.

In April 2016, Gurugram-based Snapdeal declared that it was dumping the metric. “We believe that GMV is an important metric, but it’s an outcome metric. It’s not what you chase as a company,” Snapdeal co-founder and CEO Kunal Bahl said. A month later, rival Flipkart also abandoned it.

Over the last year, the contempt for GMV has only deepened.

Right or wrong?

Industry analysts and experts are divided over GMV.

Some believe entrepreneurs made a mistake by depending too much on it. “GMV is a perfectly fine metric. That said, it’s never a good idea to rely on any one metric as a golden metric,” Kartik Hosanagar, professor of technology and digital business at University of Pennsylvania’s Wharton School, told Quartz in May 2016.

Others, however, are completely opposed to it. “While startups did extremely well by using their public relations muscle to ensure that GMV becomes the industry’s darling, it’s no more than a cover up for numbers that aren’t good enough to be reported and may well point to the lack of a sustainable business model. GMV as a metric should never have been reported because it conveys absolutely nothing. It is absolutely flawed,” said Sanchit Vir Gogia, chief analyst at advisory firm Greyhound Research.

However, even when Flipkart and Snapdeal gave up on GMV, all they did was to shift to other pointless metrics. Last year, the two companies said they had chosen customer-related indicators as their focus: Flipkart went for net promoter score (used to gauge customer loyalty) and Snapdeal for daily users.

So, the new terms, too, hardly say anything about the businesses, Arvind Singhal, chairman and managing director of consulting firm Technopak, had told Quartz. “Are they saying that they were not focusing on customers so far?” Singhal asked. “It’s true that you won’t get business if you are not focused on customers, but giving importance to your customers alone won’t help either.”

Prepared for profits?

Snapdeal’s Bahl may have declared that profitability is what his company will chase going forward, but this shift from “vanity” to “sanity” may not be easy.

“Let’s keep our expectations real,” Gogia of Greyhound said. “Profits have been a part of internal discussions at several Indian startups for some time now. But they can’t talk about it externally because they hardly have anything to show. I don’t think that’s going to change in the near future.”

“When the profits for companies like Infosys move even 3-5%, they face so much scrutiny. You think startups in the country have the appetite to face that kind of a close watch?”

We welcome your comments at ideas.india@qz.com.