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Business model

Revenue sharing

Revenue sharing is a profit model in which companies cooperate to do business and distribute profits among companies according to a predetermined distribution rate. Revenue share has been widely used in recent years as a contract form to reduce risk, especially in IT / Web related system and application development projects such as EC sites, game software, e-learning systems, and reservation systems.
Normally, when developing a system, the business is carried out by two or more companies on the ordering side and the ordering side, but in revenue sharing, at that time, the ordering side receives the development cost from the ordering side as a contract cost. Instead, the ordering side bears the cost for development, and the profit obtained from the service operated and sold after development is distributed between the ordering side and the ordering side.
Such a contract that is made by the performance-based compensation type by sharing the risk between the ordering side and the ordering side is called a “revenue share contract”. On the other hand, a contract that is widely adopted and pays a fixed development cost is called an “consignment contract”.

 

 

Index
  1. Background for revenue sharing
  2. Market price in revenue sharing
  3. Benefits of revenue sharing
  4. Disadvantages of revenue sharing
  5. Revenue sharing success conditions
  6. Revenue sharing examples
  7. Difference between "Revenue Sharing" and "Profit Sharing"
  8. Points to note when creating a revenue share contract

Background for revenue sharing

While IT / Web-related system development and application-related businesses require development man-hours and costs, there is uncertainty as to whether they will actually operate or lead to commercialization. There is strong>. Revenue sharing benefits both the ordering side and the ordering side under such circumstances.
First of all, for the ordering side, the initial cost of development can be reduced, and there is no need to pay additional costs beyond the allocation rate. Also, since it is basically a performance-based contract, the contractor can earn more and more continuous income than receiving fixed development costs. Also, even if the system development does not proceed as originally expected, you will not have to bear the additional cost from the development cost fixedly paid by the contract, so you will bear the development cost by yourself. It has the advantage of significantly reducing the risk of loss compared to the case. Another advantage is that it is a performance-based contract, so you can maintain motivation for development .
 

 

“Revenue sharing” is a contract form often seen in the IT industry

“Revenue sharing” is a contract form that is often contracted in the IT industry, and specific examples are as follows.
For example, the ordering party develops software at a low cost, and the ordering party pays the development cost. On the other hand, there are many contracts in which the ordering side pays the ordering side the profits obtained by buying and selling the software to the customer by the profit distribution agreed with the ordering side.
 

 

The real estate industry also has a “revenue sharing” contract.

In recent years, there have been an increasing number of cases where real estate owners conclude revenue sharing contracts with real estate developers who request real estate management.
Real estate owners provide real estate, and real estate developers and real estate management companies provide business skills to increase business value and distribute profits. You will be like a business partner and take risks with each other, but you will get higher profits when your business is activated.
 

 

Example of concluding a revenue sharing contract with an agency

In recent years, we may also enter into revenue sharing agreements with agents. Revenue sharing has the advantage of being able to divide the roles of the agency and the business and diversifying responsibilities. However, on the other hand, it is possible that the role of the agency will increase, so caution is required.

 

 

Market price in revenue sharing

According to the results, there is no market price such as what percentage the order side is and what percentage the contractor side is. The ratio differs depending on the business operator who actually concludes a revenue share contract.
This is natural because each other’s work content and costs will change depending on the business, but the idea of ​​the revenue sharing market is that if unexpected profits are generated, the contractor side will be more than outsourced costs. The basic idea is to make adjustments so that you can receive high rewards.
The reason for this basic idea is that the contractor also bears the “risk if the business does not go well” that only the order side should bear when performing revenue sharing. ..
It is also important to decide on the work allocation between the two at the stage of deciding the remuneration. If you don’t decide, you can’t decide the reward ratio. In addition, it is also necessary to calculate the expenses required for both parties, and even if profits are generated, if the expenses are excessively generated and operating profit is not generated, it will be overturned.
Therefore, it is necessary to carefully calculate the cost forecast, but there is a risk of trouble even if the allocation rate is decided after deciding the work allocation and expenses of both parties. This is because when doing business with revenue sharing, the ordering party has a stronger power balance, and as a result, the contractor side often loses money.
For example, there are many cases such as “You have to do more work than you expected, but the remuneration distribution rate is the same as the contractual decision.” From the perspective of the ordering party, the remuneration paid does not change no matter how much work is done by the ordering party, so there may be more requests from the ordering party.
If the company becomes the contractor, it is necessary to fully understand the value of the company and then make an effort to make the order side recognize the value of the company.
It’s not limited to revenue sharing, but it’s very important to get people to recognize the value of your products and services.
 

 

Benefits of revenue sharing

Advantages on the ordering side

Initial cost is reduced

Revenue sharing allows the ordering party to bear part (or all) of the initial cost of system construction, so the initial cost can be reduced. When building a system and starting a service, costs other than system construction are also required, so it is possible to allocate funds to operations other than system construction.

 

 

Risk can be dispersed when problems occur

With revenue sharing, risks that occur in system construction and business are also issues to be shared with the ordering side, so it is possible to diversify the risks that the company has. Risks are common to both, so it is a joint issue.
 

 

Maintenance costs, renewal costs, etc. are also shared costs

When creating a service using a system, not only the initial cost but also the cost for operation maintenance and renewal are required. With revenue sharing, this cost is also a cost to share with the ordering party with which we are affiliated, so we can reduce the burden on our company.
 

 

Since the initial cost is small, it is easy to seize business opportunities

By having the ordering party bear the initial cost, there is an advantage that the service can be started earlier and it becomes easier to capture business opportunities. One of the merits is that the time required for preparation can be reduced by reducing the preparation of funds required when a large cost must be borne.
 

 

Advantages on the ordering side

You can acquire new customers

It is assumed that there were some customers who had previously wanted to operate services on the premise of system development, but were unable to successfully raise funds for initial investment and formulate the scope of order development.
Some of them should have good products and contents, and if they had a good start to the business, they would have been able to acquire them. By taking a tie-up approach to such customers who have not received orders until now, it is possible to acquire customers whose cost and scope of contract development have been a bottleneck.
 

 

If the service becomes popular, you can continue to profit.

In conventional contract development, the ordering side receives orders for operations and makes a profit at the timing required by the customer, such as initial construction and renovation.
However, in contract development, it was not guaranteed that there would be stable orders. On the other hand, in revenue sharing, if the services operated jointly become popular, long-term and continuous profits will be generated and stable profits can be obtained.
 

 

Sometimes you can expect more profit than your customer’s budget

If the system development is done by contract development, the reward obtained as compensation for the system development within the range proposed by the ordering side will be the income. The flip side is that you can’t make more than your customer’s budget.
However, in revenue sharing, if the operation of the service makes a big profit, it is possible to earn a profit that exceeds the customer’s system development budget.
 

 

Since the profit of the service can also be obtained by the ordering side, the motivation for development and operation will increase

The contractor basically develops the system and delivers the product to the supplier, and the project is completed (there may be cases where continuous repairs are required or there may be operational support work). Once delivered, the system will leave the ordering side’s hands and no profit will be obtained, so there is a problem that the ordering side’s motivation tends to drop.
However, in the case of revenue sharing, the system will be continuously operated by both the ordering side and the ordering side. And since the ordering side continues to generate profits, there is an advantage that motivation can be maintained high.
 

 

By reducing the initial construction cost on the ordering side, the speed of ordering and the closing rate can be increased.

If you propose a revenue-sharing contract, you can increase the contract rate while accelerating the ordering speed on the ordering side. When the order amount is large, the ordering side also needs internal meetings and preparations, and it often takes a lot of effort and time to make a decision.
Revenue share has the advantage of reducing the initial cost, which allows the ordering party to make quick decisions.
 

 

Common benefits

You can get a partner with a common goal

Revenue sharing is a contract form in which profits and risks are shared to build and operate systems and services. As a matter of course, we co-develop and jointly operate one service with the goal of making a profit as a business, so if we can cooperate with a reliable company, we can get a partner with a strong joint consciousness. ..
 

 

You can continuously acquire know-how about systems and operations

In revenue sharing, the ordering side and the ordering side will mutually enter their respective fields of expertise and jointly manage their business. In that process, the ordering side can accumulate know-how related to system development and operation, and the ordering side also has the advantage of being able to acquire the know-how of the joint business.
 

 

You can build a good service by continuing the cycle of improvement

One of the purposes is to reduce the initial cost on the ordering side, but we will start the service within a certain range so that the ordering side does not have a big risk from the beginning.
In many cases, a development method is used in which only the core parts that support business profits are developed, a small start is made, and continuous improvements are made. It is also a style that can be developed and refurbished, which is one of the merits. In particular, new technologies are being used one after another in businesses that use e-commerce sites and smartphone apps, and responding to these new technologies often leads directly to business profits.
For this reason, it can be said that revenue sharing is more compatible with development methods such as agile, which starts small and improves services while rotating the PDCA cycle, rather than deciding the contract range and developing a wide range at once over time. prize.
 

 

Disadvantages of revenue sharing

Disadvantages on the ordering side

If the relationship with the ordering party deteriorates, there is a risk that the system will not be available

With the conventional purchase-only contract, even if the relationship with the developed ordering side deteriorates, it was possible to continue the business by changing the ordering party, but in the revenue sharing, the system In the case of a contract in which the ordering party owns the ownership and copyright of, there is a risk that the system cannot be used without the agreement of the owner and copyright holder.
 

 

It becomes difficult to make decisions on its own, and it becomes impossible to respond quickly

In the case of a contract in which two or more companies, such as revenue sharing, work together, they have the right to make decisions, and it is necessary to obtain mutual agreement when making decisions. It is a disadvantage in situations where doing business requires quick decision making.
 

 

Costs to be paid to the contractor will increase

From the ordering side, there are cases where the cost to be paid to the ordering side is higher in proportion to the profits obtained than when entering into a fixed contract. It can also be a disadvantage for the ordering party. In other words, there are cases where you can earn more than you can if you have a fixed contract. Due to these cases, sufficient business simulation is required before concluding a contract.
In addition, it may be necessary to coordinate between the two companies after the fact, such as handling troubles that occurred after the release of the system or application, and which side will make efforts to attract customers in the actual operation.
 

 

Disadvantages on the ordering side

Risk of cost collapse

Revenue sharing requires that the ordering party bear part (or all) of the initial investment and build the initial system. The cost incurred in this initial construction will be a mechanism to recover the profits earned from the operation of the service while receiving a distribution at a fixed ratio. If the service does not work well and you do not make a profit, your reward may be lower than your traditional fixed reward.
 

 

Entering an industry without knowledge

When doing business with revenue sharing, many of the ordering parties will also enter the business of the field that the ordering side specializes in. It is important to carefully check and check the business plan because the ordering side will enter a business that does not have know-how.
 

 

If the ordering side cannot make sales, they will collapse together

Revenue sharing is a joint operation of services and distribution of profits. If the business goes wrong, there is a risk that both the ordering side and the ordering side will have to pay for the failure.
 

 

It is difficult to estimate the reward because it is distributed from the profit obtained from the created service

The source of profit sharing is the sales of jointly operated services. Especially for the ordering side engaged in services in other industries, there is a disadvantage that it is difficult to understand the business outlook and it is difficult to estimate the compensation to be generated.
 

 

Common disadvantages

Decision-making is delayed because multiple positions have decision-making power for one business.

The disadvantage of joint business management, not limited to revenue sharing, is that the speed of decision-making is slow. Being able to decide who has the right to make decisions in situations where early decisions are needed can prevent missed business opportunities and the failure of the business itself.

 

 

 

Revenue sharing success conditions

Expected continuous business profits

The most important condition for a successful revenue sharing is whether you can expect continuous business profits after the system is developed. Revenue share is a performance-based compensation type, so there is a risk in concluding a contract with an ordering who cannot expect business profits.
Revenue share is a contract type that assumes profit sharing, so businesses that are suitable for revenue share are businesses that generate numerical sales. For example, system development such as applications and EC sites in the IT business can be mentioned as an example.
However, on the other hand, accounting and personnel-related matters are not suitable for revenue sharing because it is difficult to calculate the results as numbers.
 

 

Appropriate division of roles and profit sharing between the two

In order to realize revenue sharing, setting role division between the two (what kind of activities they mainly execute) and appropriate based on expected profits It is also important that the distribution rate is set.
First of all, revenue sharing is not suitable for some services. For example, services such as e-commerce sites and paid membership sites that clearly generate profits from service construction are suitable for revenue sharing. However, on the other hand, back office systems such as accounting and personnel are not suitable for revenue sharing because it is difficult to measure profits.
And it is important to decide whether the revenue to be distributed should be based on “sales” or “profit”.
If it is based on sales, it is relatively easy to judge the numerical value, and the ordering side needs to be careful because distributions will be generated when profits are not secured.
On a profit basis, the definition of profit can be complicated. It’s common to think of profit as sales minus expenses, but it can be ambiguous as to how much expenses are included. There are always costs involved in service operations and advertising, but it is necessary to clarify what costs are essential expenses.

 

 

Establish a relationship of trust with a partner

At revenue sharing, partners are also at risk. Therefore, building a good cooperative relationship will increase the motivation of both parties. If you want to share revenue, you must first build a relationship of trust between them. In particular, it is important to maintain the motivation of the ordering side, because the ordering side will operate without compensation at the stage when the profit prospect is not clear. For example, in order to eliminate the risk that the ordering party will not generate income if there is no result, it is effective to have a contract in which the ordering party pays the ordering party a monthly fee.
 

 

Clarify the division of roles between the ordering side and the ordering side

First of all, it is necessary for both parties to discuss how much each business content and the cost of each measure will be undertaken. For example, there are many tasks such as website operation, attracting customers, continuous content creation, maintenance management, and customer support, so it is important to clearly decide which side will bear which task. Since there are many requests from the ordering side, the key to successful revenue sharing is not to overload the ordering side.
 

 

Avoid the risks assumed in the contract

When making a revenue sharing, it is necessary to prepare a contract firmly in order to prevent troubles between the ordering side and the ordering side. Since there is a risk in terms of income on the ordering side, it is necessary to specify that the contract content is sufficient to obtain compensation. The main contract contents include division of duties, cost burden, revenue distribution ratio, cooperation obligation, copyright location, contract period, contract cancellation provisions, etc., and it is necessary to firmly determine these.
 

 

Revenue sharing examples

Abeno Harukas and Panasonic IS

The “ admission management system ” of “Abeno Harukas”, the tallest building in Japan in Osaka, Japan, has been developed and operated as a revenue sharing type. Abeno Harukas entrusted the development of the system to the Japanese company “Panasonic IS”.
The feature of the system development is that Abeno Harukas does not own any equipment or system and is provided as a cloud service by Panasonic IS .
Visitor data obtained from ticketing machines and entrance gates in the facility will be connected to the Panasonic IS data center, sales will be aggregated, and real-time guidance information will be displayed on the signage inside the facility.
Revenue shares are distributed based on the actual number of tickets sold. The distribution rate is not disclosed.
As a result, Abeno Harukas has the advantage that system development and operation costs can be changed to variable costs according to the number of visitors . Also, on the Panasonic IS side, if the number of visitors can be maximized through data analysis, profits will increase , so this increase will be an incentive and will increase motivation during operation.
 

 

 

d Gourmet and Cookpad

“D Gourmet”, a recipe provision and sharing service provided by the Japanese company “NTT DoCoMo”, receives recipes from the Japanese cooking recipe service “Cookpad”. It takes time and money to develop and prepare a large number of recipe contents in-house. Therefore, instead of utilizing the recipes accumulated in Cookpad, dGourmet shares the profits earned from dGourmet with Cookpad as a revenue share. The membership business, which is one of Cookpad’s revenue models, includes this revenue share revenue in addition to its own premium membership fee.
This case does not correspond to a system or application development project, but it is a case in which the characteristics of revenue sharing such as risk diversification of content development and continuous acquisition of business profits are strongly manifested.
 

 

Ebooks

In the publishing industry, revenue sharing has been carried out between publishers and authors in the form of a “royalties contract”. With the spread of e-books, a revenue share has been applied and a contract has been signed between the publisher and the e-book agency that sells books on the website.
Revenue sharing is being carried out as a strategy that allows both parties to earn profits by allocating the costs and profits of building an environment for book sales, even for e-books that do not know how much they will sell, which is the key to the development of the e-book industry. It has become.

 

 

Difference between “Revenue Sharing” and “Profit Sharing”

“Profit sharing” is different in that it deducts expenses

Similar to “Revenue Sharing”, there is a contract form called “Profit Share” that distributes profits. A “profit sharing” contract is a contract form in which the “operating profit”, which is the profit remaining after deducting expenses such as development costs from the business profit, is distributed between the ordering side and the ordering side.
 

 

“Profit share” does not generate distribution unless operating profit is generated

In “Revenue Sharing”, even if operating profit is not generated, that is, even if the business is in the red, the ordering must pay a certain distribution to the contractor. However, on the other hand, in “Profit Sharing”, the distribution is for the operating profit, so there is a feature that the distribution is not paid when the business is in the red.
Therefore, if the business does not go well, “Revenue Sharing” will pay the contractor a distribution of profits, but “Profit Sharing” will have the disadvantage that nothing will be paid to the contractor.
 

 

Points to note when creating a revenue share contract

In order to avoid troubles, it is important to clarify the division of roles and the responsibilities between the ordering side and the contractor. To that end, the contract needs to be determined in as much detail as possible.
For example, the items are as follows.

  • Percentage of revenue distribution
  • Revenue distribution target
  • Distribution payment period
  • With or without sales tax
  • Copyright handling
  • System operator, maintenance administrator
  • Contact point for inquiries from users
  • Response in the event of a security accident
  • Response in the event of an unexpected incident

First of all, it is necessary to clearly state the content of work and the location of responsibility. If you do not specify it, there is a risk that troubles due to excess or deficiency of work or unforeseen circumstances will occur easily. Problems related to the amount of work and where responsibility lies frequently occur in revenue share contracts, which is why you can avoid troubles by deciding on the contract.

Next, we need to clarify the percentage of revenue distribution. Of course, the first decision should be on what percentage of revenue will be distributed, but there may be a lack of decisions.
For example, if revenues increase more than many times as expected, it may be necessary to review the compensation ratio.
Therefore, if you are concerned about the case where the profit becomes high, arrange to change the distribution ratio according to the profit amount, or conclude a contract to review the compensation ratio once a year. Is important.

It is also important to describe the cost. For example, the contract of how much is allowed as an expense is applicable.
This arrangement is mandatory, especially if you are trying to enter into a contract in the form of profit share rather than revenue share.

Furthermore, it is also necessary to clearly determine the range of revenue to be distributed.For example, when operating a website, is only the revenue obtained from the website included in the reward, or even the back-end revenue is included in the reward? Is it included?
If you do not decide on the profit judgment of this part, you may have trouble later.

It is also important to describe the contract period. Revenue share contracts can have a long contract period. Therefore, on the ordering side, there is also a contract when it comes to “how long do I have to keep paying?”
That is why it is necessary to decide the contract period in the contract.
By sharing the description of whether to set a contract period or whether the contract will last forever as long as you continue to earn profits, the possibility of avoiding trouble will increase.
 

 

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