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TheRightWaytoCalculateRevenueandMarginsMaheshVC
ARCHIVE
TheRight
Wayto
Calculate
Revenueand
Iworkasagrowthstageinvestorat
RedpointVenturesandpost
practicalinformationrelatedtothe
Margins
ConsumerInternetsector.
Subscribetomyemailnewsletter
June26,2015
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http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins
1/6
4/16/2016
TheRightWaytoCalculateRevenueandMarginsMaheshVC
Thispostispartofanongoing
serieswhereIpracticallywalk
OtherPostsbyCategory:
throughimportantcalculations,
metricsanduniteconomicsfor
consumerinternetbusinesses.
Firstup,incomestatementand
margins.
Healthcare(3)
SectorBreakdowns(22)
ConsumerServices/
Marketplaces(14)
Abstract/Theory(3)
Inconsistenciesaround"margins"
aresomethingthatIcomeacross
everyweek.MetricssuchasGMV,
revenueandEBITDAarecited
often,butthereisfrequently
confusionaroundwhatthese
metricsreallymean.I'vealsoseen
manyinaccuratecomparisonsand
benchmarksforthesemetrics
giventhattheyvaryfromcompany
tocompanyandaren'talways
apples-to-apples.Let'sclarify:
Gaming(6)
PublicSpotlight(13)
Valuation(8)
China(2)
Mobile(5)
Ecommerce(4)
S-1Teardowns(7)
Education(2)
FinTech(1)
Marketing(1)
UnitEconomics(4)
Hardware(1)
GMV
GMVisthetoplevelmetricfor
manybusinesses.Itstandsfor
grossmerchandisevalue,but
couldalsobesynonymouswith
termsliketotalordervalue,total
dollarsprocessedandgross
revenue.GMVisarelevantmetric
foryourbusinessifthereare
dollarsflowingthroughtheplatform
MaheshVellanki
Uber/LyftdriversinSF
mustobtainlicenseand
registerwithcity,pay
$91andbackpay
previousyears.Letters
justsentto37kdrivers
14hoursago
thatarenotnecessarilybookedas
directrevenue.Forearlierstage
businesseswherethissometimes
MaheshVellanki
maybetheonlymeaningfulmetric,
VentureSource:"deal
it'simportanttounderstandthat
volumeisdowninQ1"
thesebusinesseswillultimatelybe
MoneyTree:"deal
valuedonrevenueandprofitability,
volumeisupinQ1"
not"GMV".Ifyoulookatthefilings
NVCA:"Q1wasbest
forcompanieslikeAmazon,Ebay
starttoyearsince
andEtsy,youwillfindthattheyare
dotcomboom"Huh?
valuedonrevenue,notGMVor
15hoursago
transactionvolume.GMVisagreat
http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins
2/6
4/16/2016
TheRightWaytoCalculateRevenueandMarginsMaheshVC
metrictolookat,butit'sevenmore
importanttounderstandrevenue
Follow@mvellank
take-ratefollowedbygrossmargin.
Revenue
Revenueisthelevelofsalesthat
thebusinessisgenerating.It's
arguablyamoreimportanttoplevelmetricthanGMV,particularly
whenGMVisn'tevenrelevant.If
thereissomeportionofthe
revenuethatwillbeautomatically
owedtoavendororsupplier,then
thatisprobablyGMV,NOT
revenue.
GrossMargins
Grossmarginisjustrevenueless
anycostofgoodssold(COGS),
whicharevariablecosts.To
calculate"grossmargin%",take
grossprofitanddivideitby
revenue(NOTGMV).Gross
marginsshowtheamountofprofit
beforeoperatingcostssuchas
marketing,overheadandsalaries.
Itisaproxyfortheprofitpotential
ofabusiness.Youmayhave
negativeEBITDAandnetincome,
butifyouhaveadecentgross
margin,thenperhapsasyour
businessscalesyouwillbeableto
coveryouroverheadwithyour
grossprofitandeventuallybecome
cashflowpositive.
OperatingCosts
Operatingcostsincludelineitems
suchassales&marketing,
overhead,payroll,travelexpenses,
etc.Thesearecostsassociated
http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins
3/6
4/16/2016
TheRightWaytoCalculateRevenueandMarginsMaheshVC
withrunningyourbusiness,unlike
COGSwhicharethecosts
DIRECTLYattributabletodelivering
yourproductorservice.A
companywithgood"operating
leverage"isonethathas
decreasingoperatingcostsasa%
ofrevenueovertime.Takeyour
grossmarginandsubtract
operatingcoststocalculate
operatingprofit,otherwiseknown
asEBIT.
ContributionMargin
Thisisanadjustmentofgross
marginwhichIsometimescall"true
grossmargin".Takeyourgross
marginandalsoloadinany
operatingcostswhichseemlike
theyaremorevariablethanthey
arefixed.Inotherwords,arethere
anyoperatingcoststhatshouldbe
allocatedtoCOGS?Foran
ecommercecompany,youwill
wanttoincludeapro-ratedamount
ofcostsforitemssuchas
returns/refunds,customerservice,
etc.Thesecostsshouldbe
broughtabovethegrossmargin
lineinordertobetterunderstandif
acompanyhasaworkingbusiness
thatcanbeprofitableinthelong
run.
SampleP&Lfor
CompanyX:Food
OrderingMarketplace
(likeGrubHub)
http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins
4/6
4/16/2016
TheRightWaytoCalculateRevenueandMarginsMaheshVC
Intheaboveexample,whilethe
companygenerates$2.5BofGMV,
theactualrevenuetothecompany
is$375M.Grossmarginsarequite
highat70%,yielding$263Mof
grossprofit.Afteryouloadinallof
theoperatingcosts,youareleft
with$93Minoperatingprofit,a
modestamountcomparedtothe
$2.5BGMVatthetop!Ifyou
wantedtobereallyprecise,then
couldaddinacontributionmargin
linebelowgrossmarginandfurther
"burden"thegrossmarginwith
someadditionaloperatingcosts
thataredirectlyassociatedwithan
incrementalorder.
I'llstopthere.Generally,thoseare
themostimportanttop-level
metricstounderstand.When
comparingvaluationmultiples
betweencompanies,itisextremely
importanttomakesureyouare
comparingmetricsproperly.GMV
shouldbecomparedtoGMV,
revenueshouldbecomparedto
revenue,etc.Therearealsoother
importantmetricssuchas
EBITDA,netincome,cashflowand
others.However,forveryearly
stagebusinesses,the
aforementionedmetricsarecrucial.
http://www.maheshvc.com/blog/therightwaytocalculaterevenueandmargins
5/6
4/16/2016
TheRightWaytoCalculateRevenueandMarginsMaheshVC
Inmynextposts,wewilltake
thesemetricsandusethemto
betterunderstanduniteconomics,
LTVandpayback.
TagsUnitEconomics
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