I’ve mentioned this a few times on my blog in passing, but I want to briefly discuss the Revenue Sharing model of doing business. When I was at AIG, we frequently used this model for various projects where we didn’t necessarily have the expertise or the ability to commit the necessary time to perfect a project. We would go out and seek the best companies in the space and work with them on specific projects, and in return for taking less up front revenue, they would receive a nice revenue share percentage that would have a very long tail. This would yield much greater revenue for the partners in the long run, and those who put skin in the game were rewarded.
While this might not work for everyone or every project, there are certain instances where this model fits perfectly. As mentioned yesterday, I am going to work with a Lowell-based sales representative to sell advertising space on Lowell.com for a commission rather than pay him hourly or hire him full/part time. As a result of earning a percentage for each sale, he will be incentivized to generate more sales and build strong relationships with local businesses. It will also be in his best interest to give me feedback to improve the site. The better the site is, the easier it will be for him to sell advertising space.
One thing to keep in mind is that the partners you work with need to have the same ethics and morals that I (or you) have when conducting business. When a person is working for straight commission, they may tell prospects anything to close a deal. Ultimately, what they promise a potential client will be the responsibility of the business owner. It’s always important to check your references when you are working with someone who will represent your business.
This model might not work for small business owners dealing with large businesses, but you won’t find out until you ask. Some companies can justify taking a risk by losing upfront sale dollars with the promise of a long tail revenue share. If you have a good business plan, it can’t hurt to pitch this model instead of paying for everything up front. The prospect of earning passive revenue for a long time is enticing to many companies, and as long as the idea is backed by a solid business plan, there is usually mostly upside for doing this.
While I haven’t done this yet in the domain or development business, I have experienced this in my former career. This is a great way to keep upfront costs down, and it’s also a great way to mitigate some risks when you are working on a new project. Sure, you lower the potential profit margin down the road, but if the companies you work with have skin in the game, they are more likely to work harder for you, assuming they see you working hard and buy into your vision.
