When talking with customers who are comparing eCommerce platforms, licensing always becomes a source of discussion. Some companies use a percentage of revenue (a.k.a., sharing of revenue, or revshare) as the way they charge businesses to use their eCommerce platform or application. While this seems like a simple and logical approach, I’ve talked to many customers who are over-spending.
In certain situations, sharing a percentage of revenue with your supplier makes sense. Here are few times when this is a good option:
1. Just getting started. Understanding all the capabilities of eCommerce – including catalog, pricing, marketing, promotions, tax & search – on top of understanding the product capabilities from an IT perspective, can be overwhelming for an organization just beginning their digital journey. But recognize, only some eCommerce suppliers can offer a fully-managed solution, including all your marketing, promotions, and user experience design.
2. Testing the market.
Some companies just want to see whether their customers or consumers are interested in buying online. In this scenario, a revshare model will be the lowest cost, because online transactions are minimal. The risk is entering into a long-term agreement which will cause over-spending if the test is successful.
3. Simple selling model: one brand / one route-to-market / one region.
When selling online is simple, using a simple solution is a great approach. revshare offerings are mostly simplistic and make it easy to sell online. However, automation usually leads to expansion into other routes-to-market or globalization. With more revenue flowing through the eCommerce platform, more revenue will need to be shared with the eCommerce supplier.
4. Limited revenue transacting online.
When selling online is inconsequential to the business, using a simple solution is a great approach. A business pay significantly less, as compared to the expense associated with a non-revshare solution. If growth isn’t in the future, and the online transactional business will remain minuscule, then a revshare model is appropriate.
In comparison, there are many situations where revshare doesn’t work, including:
1. Significant online business. When online revenue is high or grows, a percentage of that growth is automatically lost to the eCommerce supplier. Let’s put the numbers to a test: a business starts with only $10M in online revenue, then grows to $90M in Yr2. With a 1% revshare contract, the initial payment is only $100K – a great investment, given the cost of technology & services. However, in Yr2, the payment would be $900,000 per year! This is way more than the individual costs associated with technology, hosting and service components. Now imagine if grow in Yr3 was $900M — a great thing for the business, until the payment of $9M comes due.
2. Expansion into other business areas. Maybe the business starts by selling direct-to-consumer (D2C), then adds business-to-business (B2B) for each product line. Each of these new routes-to-market will likely require additional technology and services, possibly a completely different eCommerce environment. If the revshare model is a contractual obligation, the additional technology will likely be less than the payment due to the supplier – assuming the supplier can run D2C & B2B on the same servers.
3. Multiple brands are running independently. Consider the current retail fashion industry. Many struggling brands are being acquired by venture capitalist firms. These brands have existing online revenue. While the revshare may work for one brand, it becomes an expensive proposition, for the VC, when multiple brands are online. Economies of scale can be accomplished through technology consolidation, which can’t be accomplished if each brand is running stand-alone. This also holds true for conglomerates or CPG companies who want to maintain brand identity.
4. Existing IT competency. For the mature businesses, IT competencies in hardware management, software management, and application development typically exist. If these are not employees, there may be outsourcing arrangements which can be leveraged for these services. Additionally, other IT contracts may exist which would provide a better price point for cloud hosting, application management, etc. Revshare licensing will increase the total cost of ownership because existing relationships, and volume discounts, are not leveraged across the enterprise.
Knowing if a revshare model is a good option for your business requires a deep, independent, and prudent financial review. The review should include:
- multi-year revenue growth projections,
- multi-year technology growth projections,
- multi-year hosting estimates and
- a multi-year service contract, where service teams are ramped-down as the business takes more ownership.
Don’t let the easy pricing model deter the making of an educated comparison. Revshare is simply a financial model, where the costs outlined above are calculated over the life of the contract, bundled up, and sold back as a percentage of revenue, with an expected outcome to recoup all costs incurred, plus make profit.
If you want to know all your options, come visit HCL Commerce. https://www.hcltechsw.com/products/commerce
Director of North American Sales @ HCL Commerce
Selling online today shouldn’t become a burden on business growth. Know when to say NO to a revenue-sharing pricing model. hashtag#dontoverspend hashtag#ecommercebusiness hashtag#ecommercetips hashtag#ecommercestrategy hashtag#ecommercesolutions hashtag#softwarelicensing