Revenue Sharing Investments: Usurious Or Risky Business?

Revenue sharing is a business model that involves distributing a company's total revenue among its stakeholders. It is commonly used in joint ventures, affiliate marketing, and partnerships, and can also include scenarios where employees receive rewards based on the company's performance. This model is designed to drive mutual success, strengthen partnerships, and enhance employee motivation. While it offers benefits such as incentivizing new sales contracts and attracting talent, it also carries risks, including the potential for financial loss and conflicts among stakeholders. Revenue sharing is distinct from profit-sharing, which involves distributing only the profits after costs have been covered. Revenue sharing agreements should be carefully structured and regulated to ensure transparency and fairness for all parties involved.

Types of revenue sharing

Revenue sharing is a business model that involves the distribution of a portion of corporate wealth to stakeholders, such as employees and business partners, as an incentive. It is a flexible concept that involves sharing operating profits or losses among different financial actors. Here are some types of revenue sharing:

• Incentive programs: A small business owner may pay associates a percentage-based reward for referring new customers.
• Business alliances: When companies jointly produce or advertise a product, a profit-sharing system might be used to ensure that each entity is compensated for its efforts.
• Sports leagues: Major professional sports leagues use a revenue-sharing model to allocate the proceeds of ticket sales and merchandising among teams.
• Company revenue sharing: Revenue sharing can also take place within a single organization, where operating profits and losses are distributed to stakeholders and general or limited partners.
• Online business activity: The growth of online businesses and advertising models has led to cost-per-sale revenue sharing between content providers and advertising companies.
• Regulatory context: Revenue sharing is used in the Employee Retirement Income Security Act (ERISA), which imposes guidelines on the management of fund providers and mutual funds.

Tracking revenue sharing

Revenue sharing is a flexible concept that involves the distribution of operating profits or losses among different financial actors. It is a business model that allows companies to share their financial success with stakeholders, including employees and business partners.

The tracking of revenue-sharing events, such as ticket sales or online advertisement interactions, is not always transparent to all involved parties. Therefore, contracts often outline these methods in detail, and the responsible parties may be subject to audits for accuracy assurance.

Revenue sharing can be tracked manually using non-standard accounting methods, but this becomes challenging with complex licensing requirements or when dealing with a large number of media sets, each with unique distribution contracts and terms.

Software solutions, such as Maestro in the music industry, are available for tracking revenue sharing. However, these tools are often designed for big companies and may not be necessary for simpler revenue-sharing arrangements.

In the context of mutual funds, revenue sharing involves financial advisors placing clients' money in mutual funds with elevated expense ratios, generating additional revenue for the advisor through revenue-sharing agreements with the mutual fund company. This practice is considered a conflict of interest and is not always transparent to clients, who may be unaware of the total costs.

Revenue vs. profit sharing

Revenue sharing and profit sharing are two distinct concepts, despite both involving the distribution of money. Revenue sharing involves the distribution of revenue and losses among involved parties, whereas profit-sharing only distributes profits, and only if the company has made a net profit.

Revenue sharing is a flexible business model that can be used to incentivise employees, build strategic alliances, and promote innovation. It is often used by online businesses and advertisers, and can be used to distribute profits from business alliances.

Profit-sharing is used by companies to incentivise their employees, and promote loyalty. Employees may receive profit-sharing income in their paychecks, as company shares, or as part of a retirement plan.

Revenue sharing agreements should include the percentage of revenue being shared, the parties involved, their obligations, the length of the agreement, and how amendments are handled.

Company revenue sharing

Revenue sharing is a business model that allows companies to share their financial success with stakeholders. It is a flexible concept that involves sharing operating profits or losses among associated financial actors. The growth of online businesses and advertising models has led to cost per sale revenue-sharing models for content providers and advertisers.

Types of Revenue Sharing

Revenue sharing takes many forms but each iteration involves sharing operating profits or losses among different financial actors. It is often an incentive program. For instance, a small business owner may pay associates a percentage-based reward for referring new customers. It may also be used to distribute profits from a business alliance. When companies jointly produce or advertise a product, a profit-sharing system might be used to ensure that each entity is compensated for its efforts.

Revenue sharing can also take place within a single organization. Operating profits and losses might be distributed to stakeholders and general or limited partners. As with revenue-sharing models that involve more than one business, the inner workings of these plans normally require contractual agreements between all involved parties.

Advantages and Risks of Revenue Sharing

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.

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.

Online business activity

Revenue sharing is a common practice in online businesses, particularly in affiliate or internet marketing. This is often referred to as a "cost-per-sale" model, where the cost of advertising is determined by the revenue generated from that advertisement. For example, a small business owner may pay associates a percentage-based reward for referring new customers.

Online retailers such as Amazon and eBay dominate this market, with around 80% of affiliate marketing programs operating in this way. In this context, revenue sharing is a performance-based policy, acting as an incentive for associates to increase sales.

Some web content creators are also compensated based on the level of traffic their content generates, which is also a form of revenue sharing. For instance, YouTube allows contributors with at least 1,000 subscribers to generate revenue through advertising, taking a percentage of the revenue generated from viewers clicking on ads.

Revenue sharing is also used by web-based companies to invite writers to create content for their websites in exchange for a share of advertising revenue. This gives writers the possibility of ongoing income from a single piece of work and guarantees that the company will never pay more for content than it generates in advertising revenue.

In July 2023, Twitter distributed the first ad-sharing payments to Twitter creators.

Frequently asked questions