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 a somewhat flexible concept that involves sharing operating profits or losses among associated financial actors.
- Revenue sharing can exist as a profit-sharing system that ensures each entity is compensated for its efforts.
- The growth of online businesses and advertising models has led to cost-per-sale revenue sharing, which rewards every participant in an advertising network that contributed to making a sale happen.
How Revenue Sharing Works
Watch Now: How Revenue Sharing Works in Practice
What Is Revenue Sharing?
The practical details for each type of revenue sharing plan are 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.
For example, revenue sharing is also used in reference to the Employee Retirement Income Security Act (ERISA) budget accounts between 401(k) providers and mutual funds. ERISA establishes standards and implements rules for fiduciaries–or investment companies–to follow in an effort to prevent misusing plan assets. Standards can include the level of participation needed by employees and the funding of retirement plans.
ERISA allows revenue sharing for retirement plan sponsors so that a portion of earned income from mutual funds would be held in a spending account. The funds are used to pay for the costs of managing and running the 401(k) plans. The amount of money to be allocated and deposited into the revenue-sharing accounts are stipulated in the revenue-sharing agreement. The fiduciary must notify investors of how the revenue is spent, which helps to provide transparency.
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.
As of 2020, the NFL and the players' union agreed to a revenue share split that would pay the team owners 53% of the revenue generated while players would receive 47% as reported by CBS Sports. In 2019, the NFL generated $16 billion in revenue, meaning that slightly more than $8.5 billion was disbursed to the teams while the remaining got paid out to the players.
Various kickers and stipulations can be added to revenue sharing agreements. If the NFL season, for example, got extended from 16 to 17 games in the coming years, the players would receive additional revenue or a kicker if advertising revenue from T.V. contracts increased by 60%. In other words, revenue sharing agreements can include percentage increases or decreases in the future depending on performance or specific pre-set metrics.
Company Revenue Sharing
Revenue sharing can also take place within a single organization. Operating profits and losses might be distributed to stakeholders and general or 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.
Online Business Activity
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 to formally define revenue sharing with regard to defined contribution plans.