Chapter 41

Revenue Sharing

The pattern

The Revenue Sharing business model refers to individuals, groups or companies working together and sharing resulting revenues (WHAT?, VALUE?). This model is often associated with affiliate schemes commonly found on the Internet (for example, an e-commerce site operator may refer customers to a business via an affiliate advertisement and receive payment for ‘clicks’). The operator benefits from revenue received, while the business benefits from a large customer base due to referrals. Other methods enable individuals to register online to work together to achieve a common goal and share in the profits made. Customers may also be encouraged to upload content to the Internet, and in return receive a share of advertising revenue on the number of ad banner ‘impressions’ or ‘clicks’ associated with that content.

Revenue Sharing can assist in building strategic partnerships that broaden a company’s customer base and consequently increase its income and strengthen its competitiveness. These partnerships may also serve as a means to lower distribution costs and share risks with the other stakeholders (VALUE?). In order for the Revenue Sharing pattern to work, one party must increase revenues and share these with another party in exchange for its participation, resulting in a symbiotic, win–win relationship.

The origins

Evidence of Revenue Sharing can be found as early as Venice’s commercial expansion around 810 BC. 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 sharing 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

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) listed on the website. 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 media contents. 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 to media content. In the case of music, 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. Over recent years, the relevance of single purchased songs has diminished, with streaming now making 80 per cent of the overall music industry’s revenue in the first half of 2019. Competing with Spotify for market leadership, Apple’s Subscription offering (#48) of Apple Music is sold at US $9.99 monthly to the customer, while giving artists around US $0.00735 per streamed song as of 2018. 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 or subscription, as well as attracting more people to buy Apple’s hardware. Customers are not only drawn by the devices themselves, but also by the broad range of apps available. This arrangement is beneficial to both Apple and content providers looking for sales.

Revenue Sharing: Apple, iTunes and apps

Sanifair is another example of a company applying the Revenue Sharing pattern. Customers who use any of the company’s installed toilet facilities have to pay a toilet entrance fee but receive for their expenses a voucher to spend in nearby shops, restaurants and bars. Required to spend more money than the voucher provides, the stores benefit from the higher sales and then share the revenue achieved through the vouchers with Sanifair. Managing more than 520 toilets alone in German motorway service areas in 2019, the daily average rate of customers per toilet facility is at around 500, making Sanifair’s business model a voluminous affair.

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. Clickable advertisements are placed on users’ webpages and the resulting revenue is shared with HubPages.

A number of service providers and consulting firms are currently attempting to institute value-based pricing of their services with the aid of Revenue Sharing. 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.

With the upsurge in ecosystem thinking along the customer journey, this pattern has become increasingly important in recent years. The choice of the right partnering is essential.