Revenue sharing terms could be different with respect to the up-front fee per unit. It is expected that if the value of the Up Front fee per unit will be low, then the percentage of revenue sharing will be high.Similarly, if the Up Front fee per unit will be high then the percentage of revenue sharing will be, therefore the final decision will depend upon both parties that on which terms they agreed.
Average inventory level is calculated by taking the average of minimum level and maximum level it would also be different on the basis of Up Front fee and profit sharing ratio. It is expected that supplier would wish to increase the amount of expected inventory level as the higher number of units will increase the number of rentals and increase in number of rentals will provide greater revenue, which will be beneficial for both parties.
Winners and Losers with Revenue Sharing
Winner and losers with revenue sharing scheme are dependent upon the terms and conditions of the scheme like minimum inventory level, minimum whole sale price per unit and percentage of revenue sharing. Each party will try to attain maximum percentage of revenue and the supplier will try to get maximum up-front fee in addition to acquiring maximum percentage of revenue.On the other hand, Video Vault will try to get maximum share of revenue in addition to minimum Up Front fee per unit.
According to the Rentrakâ€™s revenue sharing terms it is expected that Supplier will get 47% of Video Vaultâ€™s revenue in addition to the Up Front fee of $8.03 per unit. In order to determine the revenue that the supplier will achieve, the average number of rentals is multiplied with the average rental fee per unit. Average number of rentals are calculated by assuming the 5% increase in last yearâ€™s number of rentals and average rent per unit is calculated by taking the average of price per unit of each category which comes 2.66 dollar per unit.
Therefore, the amount of profit that the supplier will get is calculated by multiplying the number of rentals per year with the average price of rent per unit and with the profit sharing percentage of supplier which is 47%. Total revenue of supplier will be calculated by adding the profit sharing revenue with the Up Front fee that the supplier will get against each unit, therefore Up Front fee income will depend upon the number of units that supplier will supply to Video Vault.
By calculating the revenue for each party, it is expected that supplier is getting approximately $70142 and Video Vault is earning $78729 under revenue sharing scheme. It is expected that before revenue sharing scheme Video Vault was generating less revenue due to low number of tapes and high purchased price of tapes. It is also expected that the supplier is getting less share of Video Vaultâ€™s revenue as compared to the previous purchase cost of tapes.
The supplier is also providing greater number of tapes at a low whole sale price which is also the reason of greater revenue for Video Vault, therefore it is a winner in revenue sharing scheme as it is receiving greater percentage of revenue as compared to supplier. However, the calculations are based on assumptions and study of Mortimer.Moreover, the average data is used for calculation, as a result it could be different if greater profit sharing percentage and higher Up Front fee is used.
There are lot of issues that need to be considered in order to implement the revenue sharing scheme. First of all, each party will negotiate for higher percentage of revenue in order to generate maximum revenue at low cost. It is expected that profit sharing percentage would be suitable for both parties that each party would receive greater revenue as compared to the revenue of pre profit sharing scheme but mainly it is dependent upon the bargaining power of each party.If there is greater number of suppliers present in the market then the bargaining power of the Video Vault will be high and if there is less number of suppliers present in the market then the bargaining power of supplier will be high and they would get greater percentage of revenue………………………………………
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