This is the third post out of a series of three posts about distribution channel deals. On the first post I explained what are distribution channels and why they are so powerful. On the second one l elaborated on the different types of distribution deals and how they are structured. On this post I’ll describe the four most common financial models of distribution channel deals. So here we go…
The 4 most common financial models of distribution channels deals:
Revenue sharing based on a percentage of the selling price
In revenue sharing deals, the revenues generated from the sold good are split between the producing company and the distributor according to a certain ratio. For example, a deal can determine that the distributor gets 10% of the selling price, for any product that was sold as part of the distribution deal.
In software products, where the marginal cost is very low, it’s even possible to see a 50-50 split between the company providing the product and the distributor. It’s also very common for the split ratio to vary according to the type of product that is being sold.
This financial model is mostly common in affiliate marketing deals, and that’s exactly what Amazon offers in its Amazon Associate program. It’s also common in licensing deals, where it’s very clear how much revenues are generated as a result of the specific licensed product or service.
The important thing to notice in this financial model is that if the selling party (i.e. you in affiliate marketing deals or the distributor in licensing deals) changes the price of the product, it also effects the other party. For example, if you’re taking part in the Amazon Associate Program, and Amazon is doing a sale on a product you’re affiliating to, then your revenues would also increase.
Looking at this model from the marketing perspective (see the previous post to learn more about this perspective), it can suit both white-labelling deals and deals where the product or service is fully branded under the name of the company that provides it.
Revenue sharing based on a fixed payment per product
In this model, one of the parties is payed a fixed amount for each product that is sold, regardless of the selling price. Usually, it’s the distributor who sells the product (via regular distribution and licensing deals), and the manufacturer of the product gets the fixed payment. Less common but also possible, is a scenario where the distributor only sends prospects to the producing company’s website (via affiliate marketing deals), and gets a fixed amount for each lead that generated a sale.
This model mostly suits regular distribution deals of tangible products, where the product is sold through the distributor. The reason is that the manufacturer of the product has very limited control on the selling price. Since the manufacturer wants to ensure that it gets paid at least the cost of manufacturing the product plus a certain margin, it usually prefers closing on a fixed payment per product.
From a marketing perspective, this model suits both white-labelling deals, and deals where the product is fully branded under the name of the company that manufactures it.
Fixed payment per user
This model is mostly used for Software as a Service products. In this model, there are two options depending on whether it’s a licensing deal or an affiliate marketing deal. If it’s a licensing deal, where the distributor gets a license to use the other company’s service, then the distributor pays a fixed amount for each user that uses the licensed service. If it’s an affiliate marketing deal, where the distributor sends prospects to the company providing the service or product, then the later pays the distributor a fixed amount for every customer that purchased the service. From a marketing perspective, this model mostly suits the white-labelling and ‘Powered by’ deals (see the previous post to learn more about these types of deals).
Fixed payment per period
In this model, the distributor usually pays a fixed annual or monthly amount for using a certain technology or service. Thus, this model mostly suits licensing deals that are marketed under white-labelling or the ‘Powered by’ deals. This model is mostly common when it’s hard to determine how the deal influences the distributor’s revenues, or when it’s hard to determine how many users are using the distributed service.
It’s important to mention that it’s possible to have a combination of a few financial models in one deal. A great example is the way Yodlee distributes its service to other financial services providers. Last time I checked, Yodlee offered a licensing model where the licensee had to pay an initial setting fee, an annual licensing fee, and a fixed fee for each user that uses their service.
From a financial perspective, it might seem like it doesn’t make sense using distribution channels, since in all four financial models you’re lowering the Customer Life-time Value by sharing the revenues from the end user with someone else. However, it still pays off since it lowers even more the Customer Acquisition Cost, and thus the overall outcome is an increased profit margins. In addition, by using distribution channels you can reach significantly more end users. Therefore, your total revenues and profits can be significantly higher.
To conclude this series of posts on distribution channels, you can see that such deals can sometimes be very straight forward and on other occasions somewhat more complex. It’s also not simple to close such deals with huge companies. However, nor is acquiring users through marketing activities.If you want to learn more on things you should be careful with when closing a distribution channel deal, then I highly recommend reading this post by Scott Britton.