Revenue sharing takes many different forms, although each iteration involves sharing operating profits or losses among associated financial actors. Sometimes, revenue sharing is used as an incentive program – a small business owner may pay partners or associates a percentage-based reward for referring new customers, for example. Other times, revenue sharing is used to distribute profits that result from a business alliance. Revenue sharing is also used in reference to Employee Retirement Income Security Act (ERISA) budget accounts between 401(k) providers and mutual funds.
What Is Revenue Sharing?
The practical details for each type of revenue sharing plan is different, but their conceptual purpose is consistent, using profits to enable separate actors to develop efficiencies or innovate in mutually beneficial ways. It has become a popular tool within corporate governance to promote partnerships, increase sales or share costs.
Private businesses aren't the only ones that use revenue sharing models; both the U.S. and Canadian governments have used taxation revenue sharing between different levels of government.
Types of Revenue Sharing
When different companies jointly produce or advertise a product, a profit-sharing system might be used to ensure that each entity is compensated for their efforts. Several major professional sports leagues use revenue sharing with ticket proceeds and merchandising. For example, the separate organizations that run each team in the National Football League (NFL) jointly pool together large portions of their revenues and distribute them among all members.
Revenue sharing can also take place within a single organization. Operating profits and losses might be distributed to stakeholders or general/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.
The growth of online businesses and advertising models has led to cost-per-sale revenue sharing, in which any sales generated through an advertisement being fulfilled are shared by the company offering the service and the digital property where the ad appeared. There are also web content creators who are compensated based on the level of traffic generated from their writing or design, a process that is sometimes referred to as revenue sharing.
Tracking Revenue Sharing
Participants in revenue sharing models need to be clear about how revenue is collected, measured and distributed. The events that trigger revenue sharing, such as a ticket sale or online advertisement interaction, and the methods of calculation are not always visible to everyone involved, so contracts often outline these methods in detail. The parties responsible for these processes are sometimes subjected to audits for accuracy assurance.
Some types of revenue sharing are strictly regulated by government agencies. The advisory council for the Employee Retirement Income Security Act formed the Working Group on Fiduciary Responsibilities and Revenue Sharing Practices in 2007 to address perceived issues with the practice of revenue sharing for 401(k) plans. The Working Group determined that revenue sharing is an acceptable practice, and new rules related to transparency were implemented under the authority of the Department of Labor. The Working Group also determined that it should take the lead in formally defining revenue sharing with regard to defined contribution plans.