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What is revenue sharing? (in ecommerce)
In online selling, revenue sharing refers to a business model where ecommerce businesses share a percentage of their revenue with online marketplaces, ecommerce store builders and other third parties. Typically, these stakeholders take a cut from each sale as a commission or fee, while the remaining revenue goes to you.
This model is commonly used by many online marketplaces like Amazon and online store builders like Shopify, among others, allowing them to profit from the transactions facilitated through their platforms and providing a marketplace for you to reach customers.
Types of revenue sharing
Apart from the typical fees and commissions, in ecommerce, there can be many forms of revenue sharing depending on business models and use cases. Listed below are some of the common types of revenue-sharing practices in ecommerce:
1 - Affiliate marketing
As a business owner, you promote your products or services with affiliate marketers. When your affiliate’s promotional efforts result in a sale through their unique affiliate links or codes, they earn a commission or a percentage of the sales revenue.
2 - Dropshipping
As a retailer in a dropshipping model, you partner with suppliers to save on investing in inventory. When customers make purchases, you share a portion of the revenue with the supplier while keeping the rest as your profit.
3 - Referral programs
In referral programs, you incentivise your existing customers to refer new customers to your ecommerce business. In return, they earn rewards, discounts or a percentage of the revenue from the referred customer's purchases.
4 - Subscription services
If you offer subscription-based services, you might share subscription revenue with content creators, influencers or partners who refer customers or drive sign-ups.
5 - Data sharing
As an ecommerce company, you can collect customer data and share it with market research firms or other businesses. You receive compensation for providing valuable insights through this data sharing.
Pros and cons of revenue sharing
Depending on the use case, revenue sharing deals have both upsides and downsides. These include:
Reduced upfront costs
Access to expertise
Obligation to share revenue regardless of performance
Can't own the customer relationship
Reduces operational overheads
Pros of revenue sharing
1 - Reduced upfront costs
Revenue sharing can lower the initial financial burden on your business, as you don't have to pay the full cost of website or app development upfront. This can be particularly advantageous for entrepreneurs and small businesses with limited budgets.
2 - Access to expertise
Partnering with a platform can provide you access to industry expertise you may lack, potentially leading to more online sales.
3 - Risk sharing
When revenue is shared, the platform shares the risks associated with your store’s performance. This means that if your online store doesn't meet expectations, the platform’s earnings are also affected, aligning their interests with those of your business.
4 - Established infrastructure
Marketplaces provide a pre-built ecommerce infrastructure, including payment processing, website hosting and customer support. You can save time and resources by using these existing services and not have to bother building everything from scratch.
5 - Reduced operation overheads
As a business owner, you can focus on product development and inventory management while the platform handles logistics, shipping and customer service.
Cons of revenue sharing
1 - Reduced profit margins
When sharing revenue with marketplaces and other platforms, you'll find that your profit margins are impacted. A portion of your earnings consistently goes to your partner in the form of commissions or fees, which can decrease the overall profitability of your business.
2 - Limited control
You may experience limitations in controlling your online business. Marketplaces often retain significant influence over the performance of your store, with their algorithms promoting your competitors’ stores as well as your own.
3 - Obligation to share revenue regardless of performance
The success of your online store isn’t guaranteed. If it doesn't perform as expected, you'll still be obligated to share a portion of your income with your partner without seeing the desired benefits.
4 - Can't own the customer relationship
Revenue-sharing may limit your ability to compete effectively with other businesses in your industry. You might find it challenging to invest in marketing, innovation or pricing strategies that can help you stay competitive, as a portion of your revenue is consistently allocated to the marketplace.
5 - Limited scalability
Revenue-sharing agreements may impede your ability to scale your business rapidly. The consistent sharing of revenue with marketplaces can limit the financial resources available for expansion and other growth initiatives, potentially slowing down your business's scalability.