Revenue sharing contracts are a kind of arrangement between wholesale manufacturers and the retailers in which wholesale manufacturers decide to charge the retailers with low prices as compared to those prevailing normally in the market and in return retailer agrees to share a predetermined fraction of his profit with them. This type of arrangement is advantageous to both the wholesalers and the retailers as it facilitates both of them.
The biggest advantage of revenue contracts is that they eliminate the cost of return of the wholesale goods. Both the Wholesale supplier and retailer share the profit of the sales and if any substandard item is found in the inventory wholesale suppliers easily replace it without charging more because they are the ones who will also share the percentage of profit on sale. So, revenue sharing arrangement works best when the cost of return is high.
Due to revenue sharing contracts some retailers start putting lower efforts to sell the wholesale supplies to the end users. They are sure, whatever sales they would make, they have to share their profit with the wholesalers and the risk of losing the money has covered already by obtaining wholesale goods at very low prices from the wholesale suppliers. So, they do not exert high level of effort and hard work to earn high profit. This arrangement provides benefits to the wholesale suppliers as well but it is also sometimes risky for them. They have to spend extra cost to develop a system to monitor their wholesale retailer’s activities. If they are unable to find reliable wholesale retailers who are unreal and hide the profit from them, they may suffer heavy losses.
In addition to this, revenue sharing contracts are not suitable for the wholesalers who supply wholesale products to many retailers as it would become hectic and difficult for them to keep an eye on their retailers and monitor their activities diligently. Hence, revenue sharing contracts are more beneficial to the retailers because they save heavy amount on not overstocking the inventories and these contracts give them surety of the wholesale products availability at all times.
