What is Revenue Sharing Model? How does it work in Business?
Revenue sharing simply refers to sharing of income with partners. It can be very beneficial for growth when done right.
As the competition grows in all industries across the world, companies are continuously seeking ways to drive new sales, connections, and growth. Revenue sharing is among the most popular business models adopted by organizations globally.
Although it takes many different forms, the basic definition of revenue sharing is the distribution of the total amount of income generated through the sale of certain services or products between the stakeholders based on a legal agreement. This way, a company can swiftly and properly share the profits resulting from a business partnership.
Involving the sharing of revenue among associated financial actors, this business model is being increasingly adopted in many industries. At its core, a revenue sharing contract allows the contracting parties to share the income obtained through a business alliance. It should not be confused with profit sharing, however, where only profits are shared.
In this model, relevant parties join their forces to create extended value and share the operating profits or losses associated with this partnership. As a flexible concept, revenue sharing can also be established as a profit-sharing model where each contributor or stakeholder gets compensated for their efforts.
Depending on the industry and the specific relationship of the parties involved, this business model may take many forms. In some cases, it functions as an incentive program where, for example, the owner of a small business pays a percentage-based reward to their partners for a certain benefit they enable. Another way of sharing revenue is to make performance-based payments to employees or contractors. As online businesses and advertising models grow, a concept known as ‘cost-per-pay’ and rewards all participants who contribute to a sale is becoming widely adopted. In any case, such contracts enable the sharing of profits obtained through products or services that are directly associated with an organization’s core business.
Advantages and Risks of Revenue Sharing
As the processes of collecting, measuring, and distributing revenue are not always necessarily visible to all parties involved, all participants of such a contract need clarity about them. Therefore, it is of great importance that all details concerning these processes and methods are clearly outlined in the contract. In some cases, audits are performed to ensure accuracy.
Like any business model, the revenue sharing model also has certain advantages, as well as disadvantages. To begin with, adopting a results-based commercial model enables significant benefits in cost planning and risk management. Leveraging the financial benefits of stakeholder diversification through partnerships, an agreement to share projected revenues ensures that all parties involved are committed to achieving tangible results. It also helps maintain a healthy checks and balances mechanism through the involvement of all stakeholders in business decisions.
However, this model is prone to the risk of short-sightedness as the stakeholders could become primarily focused on generating immediate revenues at the expense of longer-term goals or collaboration for innovation. It should also be noted that the workload associated with reporting and accounting will increase to support this model.
All in all, through a proper alignment of all parties involved on the benefits, risks, and responsibilities, a revenue sharing contract could be beneficial for all in multiple aspects. Surely, open communication and transparency are key factors for ensuring success in this model.
What Should a Revenue Sharing Agreement Cover?
Needless to mention, the specific terms and conditions of each revenue sharing agreement vary. Nevertheless, the ultimate goal remains the same: enabling a mutually beneficial way of collaboration to enhance the efficiency and profitability for all parties involved. There are many contract samples available online to provide a rough baseline of what such an agreement should cover.
Basically, a revenue sharing contract should include all the information needed to clearly outline the details of the engagement. It should identify the parties involved, as well as the purpose of the agreement, and how the revenue will be shared. All of the details concerning ownership, governing law, representations and warranties of companies, taxes, and the term should be clearly specified to avoid any conflicts in the future.
Revenue Sharing Model in the Telecommunication Industry
In the highly competitive telecommunications industry where new technologies and services are introduced frequently, large capital investments may be required to make new content available and to ensure competitiveness. The unpredictability of demand and shortening service life cycles are among the other sources of concern in this industry. Thus, it is essential for the players in the telecommunications industry to make sure that their solutions are scalable and effective enough to meet the market demands in a dynamic and increasingly complex environment.
For telecom service providers that are under pressure to rapidly introduce new services for short-term profits, adopting a revenue sharing model is an attractive option. It enables operators to reduce their risk of capital and operational expenditure since third-party service providers utilize their existing network and resources. The revenue generated through this collaboration is shared between the parties as per the lifetime of the contract and as the term of the contract is reached, the operators have the liberty to terminate the partnership engagement.
One of the main reasons why operators choose this model is that it simplifies their assessment associated with return on investment (ROI). In an industry where service life cycles are short and the projections on the customer demand pose quite a challenge, this option presents a significant advantage by eliminating upfront investments.
Reflecting on the past success of mobile operators with SMS-based services, it is evident that the main driver was the revenue sharing models they established with the content providers and media organizations to develop and market attractive services. As the technologies evolve, more advanced models are required to ensure mutual benefits today. Players in the telecommunications industry are increasingly adopting managed services with revenue sharing models to respond to the rapidly changing dynamics of the market.
Enkudo®: Telenity’s Comprehensive Solution for Managed Digital Services
As a fully managed service offering tailored for mobile operators, the Enkudo® solution bundles Telenity’s feature-rich Digital Services Platform™ with a diverse portfolio of digital services. In a comprehensive package, Enkudo covers the deployment, integration, and operations aspects of a revenue sharing model in the digital services domain. With no upfront investment for operators and stimulated revenue potential for content providers, the solution offers a win-win value proposition for all stakeholders.
Enkudo leverages the marketing capacity of mobile operators through localized landing pages, deep integration with service bundles, co-branding engagements, and omni-channel campaigns. From contract negotiations and reporting to reconciliation and settlement procedures, the Enkudo team works in collaboration with mobile operators and digital merchants to deliver the best value for the digital consumers.
By offering a robust, cloud-based platform with a rich portfolio of premium services aimed at ensuring healthy revenue growth in the digital space, Enkudo delivers the best-in-class service aggregation solution across the globe. It maximizes the customer lifetime value through powerful and effective charging algorithms and reduces fraudulent transactions thanks to its built-in security controls. It helps operators expedite their digital transformation journey and generate new revenue streams through digital content from day one, in this fast-paced environment. By managing all the critical aspects of the billing process automatically, Telenity DSP enables easy administration and monitoring to ensure that the revenue is shared through a smoothly run process.
In conclusion, the revenue sharing model is a hot topic among operators seeking to make their businesses more efficient and profitable nowadays. As mentioned above, it is important to weigh the benefits and risks of adopting such a model considering the specific aspects of your business.