A revenue share is an arrangement that determines how to distribute a business’s profits among partners or stakeholders. This is common in industries such as media, software, and affiliate marketing – for example, a content creator earns a percentage of the ad revenue their videos generate on a platform. Revenue shares enable all parties to benefit proportionally from the generated revenue, aligning their interests and encouraging collaboration.

Below, we’ll explain how revenue sharing works, its different forms, what types of businesses use it, and its benefits and challenges.

What’s in this article?

• How revenue sharing works
  
• Types of revenue sharing
  
• What types of businesses use revenue sharing?
  
• Revenue sharing benefits
  
• Revenue sharing challenges
  

How revenue sharing works

At the outset, all parties to the revenue sharing agreement establish a contract outlining the following terms:

• The parties involved and their roles

• The type of revenue to be shared (e.g. gross, net, specific product lines)

• The method of calculation (e.g. percentage, fixed amount, tiered)

• The frequency of distribution (e.g. monthly, quarterly, annually)

• Any other relevant terms and conditions

The business or project then generates revenue through sales, services, subscriptions, or other income streams. The business tracks and documents this revenue before dividing it among the parties based on the contract’s terms. Parties can receive direct payments, royalty cheques, or other forms of compensation. They also often receive periodic reports that show the revenue generated, expenses incurred (if applicable), and the distribution of funds.

Examples of revenue sharing

• Music industry: Streaming platforms such as Spotify and Apple Music use revenue sharing models to compensate artists and record labels based on the number of streams their music receives.

• Affiliate marketing: Companies share a portion of their revenue with affiliate marketers who promote their products and drive sales through unique referral links.

• Franchise businesses: Franchisors often receive royalties based on the revenue generated by their franchisees.

• Joint ventures: Two or more companies might collaborate on a project and share the resulting revenue based on their respective contributions.

Types of revenue sharing

Here are some common types of revenue sharing.

Equal split

An equal split revenue share distributes revenue equally between parties. Equal splits are simple, fair, and easy to understand and enact. However, they might not be suitable if each party brings different contributions or amounts of value to a business. This can cause disputes if one party feels they deserve more. This type of arrangement best suits partnerships between individuals with similar investments and contributions, or joint ventures where both parties have equal stakes.

Royalty-based

In a royalty-based revenue share, a licensor and licensee divide royalty revenue. This arrangement provides a steady income stream for the licensee, incentivises them to create high-quality products or services, and allows them to use existing assets without paying up-front costs. But determining a fair royalty rate can be challenging and revenue might be unpredictable.

This form of revenue sharing best suits licensing agreements for intellectual property (e.g. patents, copyrights, trademarks), creative works (e.g. music, books), and technology (e.g. software).

Retainer with royalty

In a retainer with royalty revenue share, one party receives a flat rate payment and a share of any royalties. This gives the service provider some financial security through the retainer and a potential upside through royalties. It also aligns the interests of both parties toward success. However, determining a fair retainer and royalty rate can be difficult, and the retainer might not fully cover the service provider’s costs.

This type is typically not suitable for projects with uncertain outcomes. However, it does work well for projects where there is some upfront work but also potential for ongoing revenue generation. The latter might include consulting services, creative projects, or marketing campaigns.

Percentage of gross revenue

A percentage of gross revenue share offers a stakeholder a predetermined percentage of the company’s gross revenue. This is easy to calculate and incentivises them to increase sales. However, it doesn’t account for expenses and can lead to disputes if revenue fluctuates. It might also not be fair if one party incurs substantially higher costs. This type of arrangement is ideal for sales commissions, affiliate marketing schemes, and situations where expenses are relatively low and predictable.

Percentage of net revenue

A percentage of net revenue share offers a stakeholder a predetermined percentage of the company’s net revenue. This more accurately reflects the venture’s profitability and incentivises both parties to control costs. Stakeholders might consider it more fair as well in many situations. But it can also be harder to calculate, can cause disputes if there are disagreements over allowable costs, and requires transparency regarding expenses. This form of revenue sharing best suits partnerships, joint ventures, and profit-sharing arrangements among business owners.

Fixed amount per unit

In a fixed amount per unit revenue share, a stakeholder receives a fixed amount for each unit that’s sold. It’s simple and predictable for both parties, easy to track and calculate, and incentivises the sale of more units. However, it might not reflect the true value of each party’s contribution and doesn’t account for changes in market conditions or production costs. This type is ideal for artists and creators who earn royalties or licensing agreements on products with fixed production costs.

Tiered revenue sharing

Tiered revenue sharing offers partners a percentage of any revenue, based on which predetermined revenue thresholds the company hits. This incentivises high performance, rewards parties for achieving specific goals, and can align interests over time. However, implementation and tracking can be complicated, and it can create pressure to reach certain thresholds. It best suits sales teams, affiliate marketing schemes, and any situations where measuring performance is easy and tiered incentives are appropriate.

Custom revenue sharing

Custom revenue sharing is a customised agreement that addresses the specific needs and goals of all involved parties. This type of agreement enables creative solutions and unique partnerships. However, negotiating and drafting it can be complex, and it might require legal expertise. Enforcement can also be difficult. Custom revenue shares are ideal for complicated business arrangements, venture capital investments, and unique partnerships where standard models might not be sufficient.

What types of businesses use revenue sharing?

Businesses from a wide range of industries can use revenue sharing. Here are some common types of businesses that do so.

Technology and software

• Software-as-a-service (SaaS): SaaS companies often give affiliates or resellers who promote their products a percentage of the recurring revenue each referral generates.

• App developers: App developers might share revenue with app stores, advertising platforms, or other partners involved in the distribution and promotion of their apps.

• Open-source software: Some open-source projects rely on revenue sharing models for development and maintenance. Companies or individuals contribute to the project in exchange for a share of any revenue it generates.

Creative industries

• Music and entertainment: These types of companies (e.g. streaming platforms, record labels, publishers) share revenue with their talent (e.g. artists, musicians, songwriters) based on specific usage metrics (e.g. streams, downloads, etc.).

• Publishing: Publishers often share revenue from book sales with authors, who might receive royalties based on a percentage of the selling price or a fixed amount per book.

• Film and television: In film production, actors, directors, and producers might receive a share of the box office revenue or profits from ancillary markets such as DVD sales and streaming rights.

Retail and e-commerce

• Affiliate marketing: E-commerce businesses often give affiliate marketers who promote products on their websites or social media channels a commission for each sale generated through their referral links.

• Marketplaces: Online marketplaces such as Amazon and Etsy provide a platform for sellers to list their products. Sellers share a portion of the revenue with the marketplace for facilitating the transaction.

• Franchise businesses: Franchisors that allow franchisees to operate under their brand and business model typically receive a percentage of the franchisee’s revenue as royalties or franchise fees.

Professional services

• Consulting: Consulting firms might share revenue with their consultants based on the projects they bring in or the clients they serve.

• Law firms: Some law firms use revenue sharing models to compensate partners and associates based on their contributions to the firm’s overall revenue.

• Investment firms: Investment firms might share profits with their employees or clients based on the performance of their investment portfolios.

Other industries

• Media and advertising: Online publishers and content creators often partner with ad networks, which get a portion of ad revenue based on impressions, clicks, or conversions.

• Real estate: Real estate developers might share profits with investors who provide funding for developers’ projects.

• Sports: Professional sports leagues and teams often share revenue from ticket sales, broadcasting rights, and merchandise with players, coaches, and other stakeholders.

Revenue sharing benefits

Here are some benefits of revenue sharing for businesses.

• Alignment of interests: Revenue sharing aligns the interests of all involved parties by linking compensation directly to the success of the business or project. This motivates partners and stakeholders to contribute toward common goals.

• Risk distribution: This arrangement distributes the financial risks among all parties. If a venture faces lower than expected revenues, the financial burden doesn’t fall on one party alone. Conversely, all parties benefit from higher earnings, which can make high-risk projects more acceptable and feasible.

• Cost efficiency: For startups and smaller businesses, revenue sharing can provide access to services and partnerships without up-front costs. Instead of paying large fees or salaries, businesses can offer a share of the revenue. This can help manage cash flow and reduce initial financial outlays.

• Collaboration and improvement: Because revenue sharing ties rewards to performance, it encourages collaboration and continuous improvement. Partners are likely to give their best efforts and improve processes to maximise the shared revenues.

• Scale: As revenues increase, all parties benefit proportionally. This can be particularly attractive in high-growth scenarios. Revenue sharing can remove the need for renegotiating pay or investment terms as the business grows.

• Attraction of talent: In sales, creative, or similar industries where top talent can substantially impact revenue, a revenue sharing model can help attract and retain high-performing individuals or firms by offering them a direct stake in the business’s success.

• Market expansion: Companies can use revenue sharing to expand into new markets or segments by partnering with local businesses that have existing distribution networks and market knowledge. This reduces the cost and risk of market entry.

Revenue sharing challenges

Here are some hurdles of revenue sharing and solutions for them.

Difficulty setting agreements

Determining how to distribute profits fairly can be complicated, and disputes can arise over who deserves what percentage.

Solutions

• Outline each party’s roles, responsibilities, and contributions to establish a baseline for determining fair revenue shares.

• Use precise language and formulas to define how to calculate and distribute revenue. Consider factors such as gross or net revenue, specific product lines, and performance-based metrics.

• Include contract provisions for how to resolve disputes.

Mistrust and disputes

Accounting discrepancies or lack of transparency can lead to conflicts and damage to trust.

Solutions

• Provide all parties with regular, detailed financial reports that show revenue, expenses, and the calculation of each party’s share.

• Consider engaging independent auditors to verify financial records and demonstrate transparency.

• Promote a culture of open communication where parties can discuss financial matters and address any concerns.

Short-term focus

Revenue sharing can sometimes encourage a short-term focus on maximising immediate revenue, which might come at the expense of long-term growth or sustainability.

Solutions

• Incorporate both short-term and long-term performance metrics into the revenue sharing model.

• Consider vesting periods for revenue shares, where stakeholders earn a portion of the share over time based on their continued contributions and performance.

Conflicting goals

Partners might have different priorities or goals for the business. For example, one partner might prioritise swift growth while another might prioritise profitability. These misaligned goals can create tension and hinder decision-making.

Solutions

• Confirm all parties have a shared vision for the venture’s future and agree on key goals and priorities.

• Schedule regular meetings to review progress, discuss challenges, and realign goals if necessary.

Dependency on partners

In a revenue sharing arrangement, a business’s success can be dependent on partners’ performance and actions. This can be a risk if partners fail to meet their obligations or if their interests diverge over time.

Solutions

• Set performance benchmarks for each partner to ensure everyone is contributing as expected.

• Include provisions for terminating the partnership if certain conditions are not met or if the partnership is no longer beneficial.

Limited autonomy

Businesses might have to cede some control over their operations or decision-making to accommodate partners’ needs and interests. Businesses that value independence and autonomy might find this challenging.

Solutions

• Clearly describe areas where each partner has autonomy and decision-making power.

• Promote open communication and collaboration so all partners feel heard and respected.

Unpredictable revenue

Revenue sharing can lead to unpredictable income for businesses and individuals, as earnings depend on the venture’s fluctuating performance. This can make financial planning and budgeting difficult.

Solutions

• Save cash reserves to cover unexpected expenses or downturns in revenue.

• Diversify revenue streams to reduce dependence on a single income source.

Loss sharing

While revenue sharing typically involves sharing profits, it can also involve losses. If the agreement doesn’t distribute losses fairly, it can create resentment and financial strain for some partners.

Solutions

• Establish terms for how to share losses among partners.

• Evaluate factors such as initial investment, ongoing contributions, and risk tolerance.

• Consider obtaining insurance to protect against potential losses.

Tax implications

Revenue sharing arrangements can have complex tax implications for both businesses and individuals.

Solutions

• Consult tax professionals to understand the tax implications of the revenue sharing arrangement and for proper tax reporting and compliance.