The revenue sharing business model refers to individuals, groups, or companies collaborating and sharing the resulting revenue (what? Why?). This model is often associated with affiliate systems prevalent on the Internet (e.g., the operator of an e-commerce website can refer customers to a company through an affiliate advertisement and receives compensation for the “clicks”).
The operator benefits from the revenue received, while the business benefits from a large customer base due to referrals. Other methods allow individuals to sign up online to work together on a goal and share in the profits generated.
Customers can also be encouraged to upload content to the Internet and in return receive a share of advertising revenue for the number of banner ‘impressions’ or ‘clicks’ associated with the content. Revenue sharing can help build strategic partnerships that broaden a company’s customer base and consequently increase its revenues and strengthen its competitiveness.
It can also serve to reduce distribution costs and share risks with other stakeholders (why?). For the revenue sharing pattern to work, one party must increase its revenue and share it with another party in return for their participation, resulting in a symbiotic win-win relationship.
The origins of Revenue Sharing Business Model
Evidence of Revenue Sharing can be found as early as Venice’s commercial expansion around 810 bce. Two partners formed a so-called commenda contract to cooperate in selling goods. The two parties usually comprised a merchant domiciled in Venice who acted as creditor and a travelling merchant who transported goods between ports.
Both risk and Revenue Sharing were contractually defined: the creditor took on the credit risk and the travelling merchant invested his labour. If the business was profitable, proceeds were split in the ratio of 3:1 between the creditor and the debtor respectively.
The first experiment of Revenue Sharing in France came about in 1820 when the French National Insurance Company started using a share of profits as part of its payment to its workforce. Numerous companies in various industries began to adopt profit sharing as well.
Based on the ideas of philosophers John Stuart Mill and Robert Hartman, the concepts of revenue and profit sharing spread. Hartman recognised that Revenue Sharing would help employees to feel more connected to and identify with their employer. The greater motivation engendered would in turn increase profits.
The innovators of Revenue Sharing Business Model
In 1994 brothers Jason and Matthew Olim founded CDnow, a website offering a wide range of CDs, films and video to music enthusiasts.
Three months after the company was established, they instituted the Buy Web programme, the first application of what we now know as ‘affiliate’ or ‘associate’ marketing. Record labels as well as smaller artists were able to create links to their music (and later videos and films) on the website to be purchased there.
To encourage partners to create links on CDnow, the company entered into Revenue Sharing contracts with them, whereby the partner received 3 per cent of sales of products purchased via affiliate links to CDnow. This method proved to be highly effective in attracting partners. American consumer electronics manufacturer and online service provider Apple also applies Revenue Sharing in both its App Store and its iTunes Store.
Developers program their own applications and upload them to the App Store free of charge or at prices set by them. Once reviewed and approved, these apps are published on the App Store, with Apple receiving a third of the revenue.
A similar principle is applied in the iTunes Store: bands, artists or labels can upload their music and the incoming revenue from every track downloaded is shared among Apple and the band or label in a 2:1 ratio.
Apple’s platforms provide ample room for synergies: the company increases the number and variety of applications in its App Store and benefits by generating revenue through commissions for each app sale as well as attracting more people to buy Apple’s smartphone. Customers are not only drawn by the phone itself but also by the broad range of apps available.
This arrangement is beneficial to both Apple and developers looking to distribute and sell their apps. Founded in 2006 in San Francisco, HubPages is a user-generated content, Revenue Sharing website. It acts as a social platform on which writers, the ‘Hubbers’, can share content in the form of magazine-style articles.
The site offers a variety of categories in the fashion, music, arts, technology and business worlds, where contributors are encouraged to provide articles and associated content such as videos and photos.
HubPages has become one of the 50 most visited websites in the US, and generates its income via the Revenue Sharing model. Clickable advertisements are placed on users’ webpages and the resulting revenue is shared with HubPages.
For customers this means less risk due to high costs, while the consulting firm establishes an active relationship with its clients.
When and how to apply Revenue Sharing
As value chains have become more fragmented, open and interdependent, the importance of the Revenue Sharing pattern has increased. Whatever industry you operate in, you will be able to benefit by sharing risks through strategic alliances. This applies both in the B2B and B2C context.