Gross vs. Net

Gross Margins (GM) or take rates (in the GMV world of marketplaces) are a great thing.

Rightfully so. GMs indicate pricing power in the market and show the value of your product or service to the customer. A good GM has meant a great business if the market is deep.

New age commerce companies (and their investors) are in love with it. Rightfully again. But given its importance, we’ve seen 3 misuses of it –

1. Some pad up GMs by taking costs below the GM line, which ideally belong above. Like discounts, wastes, returns, sometimes even GST.
2. Some have so high costs below to acquire the high GM that their argument of efficiency coming with scale sounds false.
3. Some are -ve GM and claim that scale will solve it. Theory claims otherwise.

We, at OfBusiness, have always believed that the right commerce metrics are the “Net” ones: Contribution Margin, EBITDA and PBT. In a deep market. We believe (and have executed) that low, yet positive Net metrics are more critical than showing a high GM on paper.

Our choice of supply chains (bulk raw materials) has helped us be that. They are less risky, standardized and large in transaction sizes, which help in cost effectiveness across the P&L. Once +ve, the Net metrics creep up.

Gross can be vanity, Net always the reality.

Read more from CEO speaks Column:- https://www.ofbusiness.com/ceo-speaks