GM1, GM2 and GM3 in e-commerce

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In the context of e-commerce, GM1, GM2, and GM3 are terms used to refer to different levels of Gross Margin, which measure profitability at various stages by accounting for different types of costs:

  1. GM1 (Gross Margin 1): This is the most basic form of gross margin. It is calculated as the difference between revenue and the cost of goods sold (COGS), divided by revenue. Essentially, it reflects the profit made on products or services before accounting for any additional operating expenses, marketing, or administrative costs. The formula for GM1 is:GM1=(Revenue−COGSRevenue)×100GM1=(RevenueRevenue−COGS​)×100COGS includes direct costs attributable to the production of the goods sold by a company.
  2. GM2 (Gross Margin 2): This metric extends beyond GM1 by subtracting additional variable costs associated with selling the products, such as payment processing fees, fulfillment costs, and direct marketing expenses related to selling those products. It provides a more detailed view of the profitability by considering more costs that directly impact the cost of selling a product. The formula for GM2 might look like: GM2=(Revenue−COGS−Variable CostsRevenue)×100GM2=(RevenueRevenue−COGS−Variable Costs​)×100Here, variable costs could include any expenses that vary directly with sales volume.
  3. GM3 (Gross Margin 3): This level of gross margin takes into account even more costs, including operational expenses such as overhead, administrative costs, and other indirect costs that are not included in GM2. GM3 provides an even broader perspective on the profitability of a business, reflecting the efficiency of the entire operation, not just the cost of selling products. The formula for GM3 might be:GM3=(Revenue−COGS−Variable Costs−Operational ExpensesRevenue)×100GM3=(RevenueRevenue−COGS−Variable Costs−Operational Expenses​)×100

Each of these metrics provides a different level of insight into the financial health of an e-commerce business, allowing business owners and managers to make informed decisions about pricing, cost management, and strategic planning. GM1 focuses on the core profitability of products, GM2 provides insight into the costs associated with selling those products, and GM3 offers a comprehensive view of overall business efficiency.