Revenue-sharing agreements are gaining traction in the marketing world. But before you jump in, it’s crucial to understand what they are, their pros and cons, and how to structure a successful deal.
What is Revenue Sharing?
Instead of a fixed fee, clients pay agencies a percentage of the revenue generated by the agency’s work. Sounds simple, right? Well, marketing’s impact can be tricky to measure.
The Challenge: Attributing Revenue
Marketing works in two ways: short-term sales boosts and long-term brand awareness. While immediate sales spikes are easy to track, brand building’s impact is more subtle. This means you might:
- Pay the agency for sales they didn’t directly cause.
- The agency might miss out on a share of the revenue they helped generate.
Why Consider Revenue Sharing?
Despite the challenges, revenue sharing offers unique advantages:
- Reduced Risk for Clients: Variable fees based on performance ease the financial burden.
- Aligned Incentives: Agencies are motivated to focus on strategies that directly drive sales.
- Potential for Better Results: Shared goals can lead to more effective marketing campaigns.
Setting Up a Revenue Sharing Agreement
1. Defining Revenue:
- Total Revenue: This is the most straightforward approach, but consider if your business has distinct revenue streams (e.g., B2B vs. B2C).
- Partial Revenue: Sharing only a portion of revenue might be appropriate for businesses with separate marketing channels (e.g., online vs. offline sales).
- Avoid Attribution-Based Sharing: While tempting, focusing solely on revenue attributed to specific marketing efforts can lead to skewed priorities.
2. Determining the Percentage:
There’s no magic number. Factors like company size, maturity, scope of work, industry, and profit margins influence the ideal share.
Here are some tips:
- Variable Rates: Consider a tiered structure where the percentage decreases as revenue increases. This incentivizes growth while keeping costs manageable for you as a client.
- Benchmarking: Research typical revenue share percentages in your industry for a starting point.
Summary
Revenue sharing isn’t a one-size-fits-all solution. While it has limitations, a well-crafted agreement can foster a powerful partnership between clients and agencies, ultimately driving growth and success.
