Tuesday, June 14, 2022
HomeVenture CapitalLeaky Bucket or Layer Cake? Why You Cannot Ignore GMV Retention

Leaky Bucket or Layer Cake? Why You Cannot Ignore GMV Retention

Think about you’re operating a market startup — let’s name it ACo — that enables shoppers to promote spare objects they’ve round the home. You discover after a number of months that solely 25% of your new sellers are coming again every month, however they’re promoting simply as a lot as they did in that first month. Fairly good, proper? 

Then, you hear a couple of competitor: BCo. They launched concurrently you, are rising new income on the identical fee every month, and likewise see 25% of sellers come again. However the sellers that they keep double their month-to-month gross sales on the platform. And by the tip of the 12 months, BCo is almost 2x your scale!

ACo vs BCo GMV Retention by Cohort

ACo and BCo differ when it comes to one main metric: GMV (gross merchandise worth) retention. I’d argue that that is probably the most predictive metric of whether or not you’re constructing a market enterprise that’s simply OK or actually nice. It determines whether or not your online business resembles a “layer cake” or a “leaky bucket.” Nevertheless it’s additionally probably the most ignored metrics — many founders don’t even observe it. 

On this put up, I’ll cowl what GMV retention is together with a spreadsheet template for how you can calculate it why it’s best to care about it, and the benchmarks our crew at a16z makes use of to investigate market efficiency.

What’s GMV retention? (And how you can construct your “spaghetti charts”)

GMV retention is a cohort-based approach of taking a look at how wholesome all sides of your market is.

Many corporations measure consumer retention, which exhibits the frequency with which customers return to your product. Let’s say ten customers transact on ACo for the primary time in January 2022. 5 of them come again and transact in February 2022, and three come again in March 2022. Your one-month (“m1”) consumer retention for this cohort is 50% (5 /10 preliminary customers), whereas your m2 consumer retention is 30%.

GMV retention takes this a step additional by measuring how a lot of every cohort’s spend you keep over time. Say these ten customers spend $10,000 on the platform in January, and the 5 that come again in February spend $7,500. Your m1 consumer retention might solely be 50% – however your m1 GMV retention is 75%! ($7,500 / $10,000).

Like consumer retention, GMV retention is usually displayed in tables and “spaghetti charts.” I’ve uploaded a full template right here for a way our crew calculates these numbers; the “output” for that pattern firm is displayed under.

GMV Retention by Cohort
"Spaghetti Chart" of GMV Retention Cohorts

GMV retention can vary from 0% to 100%+ (typically, it’s far above 100%) for every cohort every month. Usually, one facet of a market’s GMV retention is way stronger than the opposite; usually, that is the availability facet.

Why? Ideally, suppliers discover sufficient worth to construct a enterprise on the platform, whereas particular person shoppers transact much less incessantly. An instance of that is Airbnb. You might solely ebook one or two per 12 months, however ideally your host is filling the property each week. Some marketplaces see sturdy GMV retention on either side: for instance, Uber and Lyft. The availability facet is probably going nonetheless extra energetic, however shoppers might also transact on the platform weekly or month-to-month.

Why must you measure GMV retention?

There’s a number of the explanation why it’s best to care about GMV retention:

  • It’s an indicator of product-market match. Excessive GMV retention can mirror one in every of two issues: (1) most of your customers retain and proceed to transact over time; or (2) solely a few of your customers are retaining, however they’re transacting far more on the platform over time. Both of those situations is fairly optimistic on the subject of product-market match, exhibiting {that a} non-negligible proportion of customers are discovering worth out of your product.
  • It makes it simpler to hit development targets. When your current suppliers (or patrons) are increasing GMV, it requires fewer new customers to achieve your development targets. Keep in mind the story of ACo and BCo: the upper your GMV retention, the extra your current prospects are fueling the expansion of the enterprise versus having to accumulate an enormous quantity of latest prospects. 
  • It provides you extra “wiggle room” on advertising spend. Many traders will calculate lifetime worth (LTV) versus buyer acquisition price (CAC) for either side of {the marketplace}. In lots of instances, they’re in search of a 4x+ ratio. Greater GMV retention means the lifetime worth of a consumer can also be greater — they are going to generate extra GMV (and subsequently extra income) for you over time. This lets you spend extra on advertising to accumulate customers and maintain a wholesome ratio.
  • It could actually present you the way buyer well being is trending over time. GMV cohorts paint an image of how “wholesome” your market is because it grows. This may be onerous to understand by taking a look at total development, as every new cohort of customers is hopefully larger and spending extra (which sounds nice). But when, for instance, your m6 GMV retention drops from 75% for older cohorts to 30% for brand spanking new cohorts, this can be an indication that the worth prop in your early adopters isn’t translating to a broader consumer base.

What does “nice” GMV retention appear like — and the way do you attain it?

In our evaluation of GMV retention cohorts, we’re in search of a number of issues:

  1. How does GMV retention benchmark vs. different marketplaces? Extra on this under! Buyers will “comp” (or examine) the retention in your market versus related corporations. 
  2. Do the curves plateau or “smile”? Retention curves ideally flatten over time, usually between m6-m12. In some instances, they really begin to “smile” (curve again up) as churned customers reactivate or retained customers proceed to broaden.
  3. How are cohorts trending over time? Ideally, newer cohorts look simply pretty much as good as and even higher than older ones. On a spaghetti chart, this sometimes seems as the entire strains bunched pretty intently collectively.
Anatomy of a GMV Retention Cohort Spaghetti Chart

The perfect examples of top-tier GMV retention come from marketplaces which have made it to IPO. These corporations report GMV retention on an annual foundation — the information under exhibits retention for a cohort’s second 12 months on a market versus their first 12 months. That is usually reported at IPO, however not essentially after, so I’ve included probably the most not too long ago reported cohort for every firm.

Annual GMV Retention for Public Marketplace Companies

Personal comparables are available in considerably under these numbers. Under are basic benchmarks for client marketplaces our crew has seen during the last ~18 months. These metrics are for corporations we’ve spent vital time with on the seed via Sequence B, in order that they’re seemingly a bit greater than the true “market” common.

Provide Facet

Finest-in-class client marketplaces see provide facet GMV retention at or above 100% via m12 and past. This doesn’t imply that 100% of suppliers retain — extra incessantly, we see that 50-70% of suppliers retain, however broaden their GMV 2-3x+ over time.

We’ve noticed, nevertheless, that the common market retains provide facet GMV nearer to 80-95% within the first three months – after which plateaus round 45-50% by m12.

Supply Side GMV Retention Benchmarks

What drives excessive provide GMV retention? There are two keys: 

  • Create a optimistic first sale expertise – this may be when it comes to worth (do sellers really feel like your supply is near “market” worth?), time to sale (how briskly does stock flip over?), and course of (how straightforward is it to get the product to the tip client?). This usually requires doing issues that don’t scale when kickstarting {the marketplace}. For instance, sneaker market StockX famously bid on each early itemizing themselves, in order that sellers would come again to promote once more! 
  • Assist sellers broaden their enterprise – probably the most profitable marketplaces not solely turn into a big channel for his or her sellers (assume 50%+ of their income), but additionally assist sellers construct an even bigger enterprise than they thought doable. As a market, you possibly can encourage this through instruments to assist your energy sellers perceive and analyze demand, optimize their listings, and even finance stock. You’ll know that is taking place when sellers develop particular services or products simply to promote with you! One instance of that is automobile share market Turo, with some sellers upgrading from renting their one private automobile, to purchasing a complete fleet of automobiles simply to listing on {the marketplace}.

Demand Facet

Demand facet GMV retention tends to be decrease than provide facet, as mentioned above — nevertheless it’s nonetheless necessary. This retention helps decide the speed of latest consumer development required to hit your total development targets. Poor demand facet retention can even yield poor provide facet retention, as suppliers who aren’t getting transactions will churn.

Demand Side GMV Retention Benchmarks (1)

What drives excessive demand GMV retention? 

  • Assist patrons discover their “match.” Some customers arrive at a market realizing precisely what they’re in search of, however many wrestle with resolution fatigue. How are you going to fight this? You possibly can present high-quality suppliers first, permit for exact filtering based mostly on preferences, and even make the buyer soar via a number of hoops (and share extra on their preferences) earlier than seeing choices. Managed marketplaces for providers have a tendency to do that very effectively. Take into consideration the buyer expertise on Zocdoc: the listing of really useful suppliers you obtain is already filtered for docs who take your insurance coverage and who’ve openings at occasions you’re free.
  • Construct loyalty through distinctive stock and perks. It’s getting simpler for suppliers to “multi-tenant” throughout marketplaces – and patrons will comply with them! One approach to retain patrons is offering provide they will’t get elsewhere, via distinctive and even area of interest sellers that listing completely with you. The early days of Depop had been instance of this: sellers constructed an id on the platform, and Depop grew to become the go-to place for secondhand classic items you couldn’t discover anyplace else. For services and products that act extra like a commodity, you can even construct loyalty immediately with patrons via a rewards program. Uber and Lyft have each launched these for riders – and subscriptions like DoorDashs DashPass are one other good instance. If a client is paying for particular service with you, they’re unlikely to go transact some place else.

For founders constructing early to late stage market startups, GMV retention is a important metric to trace. When you’re an early stage founder, you possibly can attain me at @omooretweets.


SEC filings used for calculating public firm GMV retention:

Poshmark: https://traders.poshmark.com/information/news-details/2022/Poshmark-Inc.-Experiences-Fourth-Quarter-and-Full-Yr-2021-Monetary-Outcomes/default.aspx

Etsy: https://www.sec.gov/ix?doc=/Archives/edgar/information/1370637/000137063722000024/etsy-20211231.htm

DoorDash: https://www.sec.gov/Archives/edgar/information/1792789/000119312520292381/d752207ds1.htm

Airbnb: https://www.sec.gov/Archives/edgar/information/1559720/000119312520294801/d81668ds1.htm

Lyft: https://www.sec.gov/Archives/edgar/information/1759509/000119312519059849/d633517ds1.htm

Upwork: https://traders.upwork.com/static-files/13cc0abe-5577-4f83-b260-a95811318078

Fiverr: https://www.sec.gov/ix?doc=/Archives/edgar/information/0001762301/000117891322000725/zk2227154.htm

FarFetch: https://www.sec.gov/Archives/edgar/information/1740915/000119312518252315/d532260df1.htm

The RealReal: https://www.sec.gov/Archives/edgar/information/1573221/000119312519163007/d720814ds1.htm

ThredUp: https://www.sec.gov/ix?doc=/Archives/edgar/information/1484778/000148477822000044/tdup-20211231.htm

Want: https://www.sec.gov/Archives/edgar/information/1822250/000119312520298630/d82777ds1.htm

Eventbrite: https://www.sec.gov/Archives/edgar/information/1475115/000119312518255960/d593770ds1.htm

Rover: https://www.sec.gov/Archives/edgar/information/1826018/000095012321002084/ck0001538533-s4.htm

Vacasa: https://www.sec.gov/Archives/edgar/information/1840927/000110465921097288/tm2123195d2_425.htm

1stDibs: https://www.sec.gov/Archives/edgar/information/1600641/000119312521162999/d244039ds1.htm

Coursera: https://www.sec.gov/Archives/edgar/information/1651562/000119312521071525/d65490ds1.htm


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