What Is Revenue Sharing? Importance, Benefits, and Methods

Sharing in all forms of life is essential.

When you operate a large company, you have different stakeholders. The profits you get shouldn’t be limited to your company because there are multiple stakeholders and shareholders involved.

When different entities come together to produce or advertise a product, a revenue-sharing model is used to ensure each entity is fairly compensated for its efforts. Companies use revenue management software to allocate revenues to stakeholders.

Industries such as sports, and gaming use a form of a revenue sharing model. For example, gaming studios may lack the funds to pay their team upfront and decide to share the risks or rewards as soon as they generate revenue. 

Another example is application development for Android and iOS ecosystems. Developers have to pay a certain amount to the respective store for purchases. 

States or provinces can also share revenues with local or federal governments. Laws determine how much revenue to share.

Why is revenue sharing important?

Revenue sharing keeps stakeholders, shareholders, and investors happy. In fact, some companies implement it to keep their employees happy by using commissions and bonuses. 

Take the case of a sports league. Several sports teams use revenue sharing with the amount of revenue collected from ticket sales and merchandise. All the teams in the National Football League (NFL) pool their revenue, and this amount of money is shared among all the members. 

How does revenue sharing work

With the revenue sharing, businesses keep some of the revenue they receive and split it among their stakeholders, shareholders, and investors.

Some companies may even share this with third-party sellers who sell their products or services on their behalf. 

In this way, the regulator allows the operator to keep some portion of the revenues it receives (beyond a pre-specified point) from selling the product or service. 

The operator is required to give the rest to customers through price reductions, refunds, or increased investment in facilities or services.

Concepts of revenue sharing

There are different but closely related concepts of revenue sharing that are essential to know. Two important concepts of revenue sharing are total revenue sharing and a revenue-sharing business model.

Total revenue share

Total revenue share measures a product's profitability. It takes marketing and manufacturing costs into account and is calculated as the ratio of the costs required to fulfill an order. 

Company reports mention the total revenue share, which represents the direct costs related to revenue. This includes raw materials, gas, and labor. 

What remains is known as gross margin, which is the total income after the cost of production gets deducted. 

Total revenue share is always expressed in percent form. 

Indirect costs such as rent and accounting are not included since these cannot be directly linked to a product.

Revenue share business model

In a revenue-sharing business model, a company shares additional profits with its business partners. A partner gets revenue from a company stakeholder.  

For example, within the iOS ecosystem, when a third-party developer makes applications for the App Store, they need to share a specified cut with Apple. This applies whether the developer generates revenue from both app and in-app purchases. 

A revenue sharing agreement is a legal document between two parties. Under this agreement, one party shares a percentage of revenue profits with the other. 

For example, say, a music artist signs with a record label. Since the label has rights to the tracks, they would have to pay the label 10% of all revenue the artist gets from music sales. The company uses revenue sharing to recover its costs on production and promotion. 

Some of the common sections under a revenue-sharing agreement include: 

• Representation information
• Governing laws
• Arbitration
• Amendment
• Revenue sharing agreement

Benefits of revenue sharing

In the revenue sharing style of funding, investors fund a company and receive a percentage of that company’s revenue. This is typically in the range of two to ten percent. The returns depend on the company’s growth. 

Here are some of the benefits of revenue sharing: 

• Shared growth: The structure of revenue sharing allows all parties involved to share revenue. The company and all its shareholders focus solely on generating sustainable revenue. 
• Less impact on the bottom line: Revenue sharing takes a percent of the investment’s gross revenue. This implies that even if your company has a slower rate of revenue for a month, there is less impact on your bottom line. 
• You remain in control: Once you meet the repay cap, you don’t have to share future revenue with your investors or shareholders. You retain full ownership and control over your company. 
• Higher chance of funding: This model gives companies a higher chance of being funded since the focus is on revenue growth. The changes in potential investments are bigger.
• Provides better direction: Revenue sharing does away with equity. Investors are simply creditors instead of being owners of a business. Hence, there is a better direction, and you can focus on growth and higher profits and returns. The focus on revenue instead of acquisition makes success easier.

Disadvantages of revenue sharing

While advantageous, revenue sharing does have its fair share of downsides such as shifts in focus and giving rise to errors.

Here are some of the disadvantages of revenue sharing:

• Losing sight of longer-term goals: While the priority on revenue is key, there are chances that this will be directed towards generating it quickly. This can cause teams to lose sight of larger and longer-term goals, which is not good for business. It is not ideal for revenue generation to happen at the cost of being profitable.
• Time spent on reporting and accounting: There is significant time devoted to accounting and reporting the partnerships closed deals and final prices when a revenue share is involved. If there is no efficient system in place that defines how both sides gather information, this increases the possibility of errors.  This causes doubt about strains in relationships that otherwise would provide many benefits.

Revenue sharing vs. profit sharing

Profit-sharing gives employees a certain amount of a company’s profits. This depends on business profits, current employee wages, and the amount set by the company.

A profit-sharing plan, also known as a PSP, gives employees a certain amount of money based on the company’s earnings over a predetermined period of time. The profits come in the form of cash or stock if the company is publicly listed. 

A general revenue sharing model distributes income generated by the sale of goods or services between the stakeholders and the contributors. After expenditures, the company shares the remaining revenue with its employees.

Best revenue management software

Companies use revenue management software to check if sales numbers match customer payments, distribute revenue to stakeholders, and monitor the performance of products and services. This helps evaluate revenue data.

To qualify for inclusion in the revenue management software category on G2, it must:

• Help track pricing details of products and services
• Help with revenue recognition and allocation
• Manage different types of revenue
• Analyze the performance of various offers and packages
• Provide the impact of discounts on revenue
• Monitor revenue per customer
• Help provide best practices for optimizing revenue management

*Below are the five leading revenue management software from G2's Fall 2024 Grid® Report. Some reviews may be for clarity.

1. NetSuite

NetSuite helps businesses gain the visibility, control, and agility to build and grow successful businesses. First focused on financials and ERP, it now provides an integrated system that also includes inventory management, HR, professional services automation, and omnichannel commerce. It is used by more than 29,000 customers in 215 countries and dependent territories.

What users like best: 

"Netsuite allows us to be as flexible as needed - it’s good at many different things, but it’s great at being customizable. We can change the system to suit our needs and adapt it on the fly as requirements change." 

- NetSuite Review, Will R. 

What users dislike: 

"It is very complex to manage, and the setup is a long and tedious process. However, once you get past the initial learning curve, you can utilize a lot of automation to reduce the manual workload. It's definitely a tool that requires someone to optimize it constantly, and lots of consulting agencies can assist with those complexities as well." 

- NetSuite Review, Jess N.

2. Sage Intacct

Gain real-time financial and operational visibility throughout your business with Sage Intacct. Leverage comprehensive financial controls to ensure security and compliance. Streamline your business processes using extensive automation to reduce labor, and save costs. 

What users like best: 

"For me, one of the best parts about Sage Intacct is the flexibility and the intuitiveness of the system. This system seems to have been built with the end user in mind and has a very logical layout."

- Sage Intacct Review, Chrissy S.

What users dislike: 

"It throws up many unexpected errors and a very crucial time. For example, I have been facing an issue with generating aging and Sub ledger accounts for the past 2 days; it's throwing up a message asking me to contact customer care. The report is generated only in CSV and not in Excel format. Also, if the Excel format was exported in the latest version of MS Office, that would be better."

- Sage Intacct Review, Ganesh K.

3. Salesforce Revenue Cloud

Salesforce Revenue Cloud is a powerful revenue management platform that helps businesses streamline their sales processes, increase revenue, and improve customer satisfaction. It offers a suite of integrated applications for sales forecasting, pipeline management, opportunity tracking, quoting, and contract management.

What users like best: 

"Salesforce Revenue Cloud is a versatile solution that boosts efficiency across multiple departments, including sales, finance, and operations. It simplifies complex revenue processes, ensuring accurate forecasting, billing, and compliance. By delivering real-time insights, it empowers teams to make informed decisions. Its automation and integration capabilities minimize errors and enhance overall business performance throughout the entire revenue cycle."

- Salesforce Revenue Cloud Review, Sergei N.

What users dislike: 

"With the current Configure, Price, Quote (CPQ) system being a managed package, scalability becomes an issue. When attempting to generate a quote with over 400 lines, we frequently encounter CPU time limit or Apex heap size errors."

- Salesforce Revenue Cloud Review, Rakesh B.

4. SAP S/4HANA Cloud

SAP S/4HANA Cloud offers a comprehensive solution for revenue management, enabling businesses to optimize their financial performance. It provides integrated capabilities for order management and efficient invoicing, revenue recognition, and compliance.

What users like best: 

"Rapid deployment and quick time to value are key advantages of being cloud-based, as it allows for significantly faster deployment than on-premise solutions. Additionally, its powerful and advanced analytics capabilities enable data-driven decision-making, providing valuable insights for your business."

- SAP S/4HANA Cloud Review, Carlos C.

What users dislike: 

"In general, I find structured tables and data elements, especially those not stored in a specific static table, to be quite frustrating. As a data consultant, tracing and managing this information effectively becomes challenging."

- SAP S/4HANA Cloud Review, Joemarie D.

5. Chargebee

Chargebee is a subscription management and revenue operations platform that helps businesses manage their recurring revenue models. It provides features such as customer onboarding, subscription management, invoicing, payment processing, tax management, and analytics. 

What users like best: 

"Whenever I identify a need, I research whether Chargebee supports it, and I’m pleased to discover that it often does. I also appreciate how transparent their pricing model is. The ability to use Chargebee for free up to a certain revenue threshold has been an excellent opportunity for our small startup to test the platform effectively."

- Chargebee Review, Ryan L.

What users dislike: 

"The hard-coded limits, though few, compel us to create workarounds. For instance, the inability to disable a feature once it has been enabled can be quite frustrating."

- Chargebee Review, Ian A.

Moving forward with revenue sharing

Managing a large company is challenging. With a large revenue inflow, it’s important to ensure that all stakeholders get their share of the revenue. Revenue management software makes revenue sharing easy across different functions, including sales, marketing, and accounting.

Unlock your business potential with revenue operations & intelligence (RO&I) software. 

This article was originally published in 2022. It has been updated with new information. robust