Learn more about the pros and cons of revenue sharing, whether it is the right revenue model for you, and how to draw up a revenue sharing agreement.
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Revenue sharing takes several forms, although each iteration involves an agreement between associated financial actors to share operating profits or losses. Sometimes, it's an incentive program where a small business owner pays associates or partners a percentage-based reward for a service or action that boosts sales, subscriptions, or the bottom line—for example, referring new customers.
So how does revenue sharing work?
Let's take the example of the ecommerce industry. The growth of online advertising models has led to a form of revenue sharing called cost-per-sale. It rewards every participant within an advertising network that contributed towards making a sale happen. Other revenue sharing examples include:
Revenue sharing is a performance-based income model that involves sharing business profits or losses among participating partners. Revenue sharing is a profit-sharing system that ensures all parties involved are compensated for their contribution to the business.
No, revenue sharing is not for everyone. Moreover, since the businesses and the parties to the revenue-sharing deal share either the profits or losses, it is not a steady income source.
From the revenue-sharing definition above, you can think of it as a commission-only agreement with no base salary where you only get paid if your efforts and expertise bear fruits. Therefore, it is best to implement it as supplemental income. On the other hand, the fee-for-service businesses model offers a more reliable revenue stream.
All business partnerships have risks, which you can only mitigate when all parties have each other's best interest in mind. The pros of a revenue-sharing plan include:
The biggest con of a revenue-sharing plan is it lacks a consistent, predictable income. However, you can mitigate it by shortening your revenue sharing period.
Revenue sharing refers to a top-level income split between associated parties—generated from the sale of products or services. You can also refer to it as a commission-only agreement where the parties share the profits or losses. In contrast, profit-sharing deals split the company's profits—the total revenue left after subtracting all costs.
The key to landing a fantastic revenue-sharing deal lies in its structuring. The foundation should be solid and performance-based to motivate associated parties to increase productivity. Everybody gets paid when the business earns more.
The margins for information businesses are notably higher than the ecommerce sector. Therefore, you can agree to structure at a higher percentage for the former and concentrate on increasing volume for the latter to attract top skills. However, it is critical to keep the following points in mind before coming up with a revenue-sharing agreement.
Your expectation from a potential revenue-sharing deal is simple—everybody earns more when there is higher productivity generating sustainable revenue. Likewise, the more effort your partner puts into building your business, the more income you receive.
Revenue-sharing partners offering skills and expertise look for two main things in a revenue-sharing deal:
The first strengthens the deal, while the second allows them to build a portfolio by playing different arrangements against each other. As a business, understanding this point of view will enable you to structure attractive and successful revenue-sharing deals.
Additionally, not all revenue-sharing agreements will work. Some will be favorable for you, while others will not. The trick is to set your filters carefully and learn how to structure fair agreements that benefit all parties, and stick to the fine print. It would be best to put in clauses that will motivate the other associated parties to deliver gold.
When looking for suitable revenue-sharing partners, you should start by evaluating your operating ecosystem and identifying the competition, marketing influencers, skilled professionals, and other stakeholders.
Suppose you already have professionals offering fee-for-service and you like their work. In that case, you can approach them to become your revenue-sharing partners to increase their performance and buy-in. You can also approach marketing and social media influencers, and bloggers with a significant following among your target demographic.
Once you find potential partners, you need to evaluate if they fit into your business model. But, first, get to know them personally and do your due diligence.
There are three primary revenue-sharing models you can choose from when deciding on the type of partnership you want. These include:
In addition, ensure that the revenue split is clear and has no ambiguities. It should also be relatively easy to calculate how much you will pay your partners. Finally, ensure your agreement accounts for different scenarios, such as selling the business, cloning the idea or business, terminating the partnership, handling intellectual property, and handling liability issues.
