TURNING THE SUPPLY CHAIN INTO A REVENUE CHAIN

TURNING THE SUPPLY CHAIN INTO A REVENUE CHAIN

Agreeing to share sales revenue with suppliers allows companies to purchase goods for a lower price, increase revenue, and cope with fluctuations in customer demand.

The idea

In the 1990s, the leader of the video rental market, Blockbuster, found itself frustrated by never having enough copies of popular movies in stock to satisfy demand at peak times. The problem was that Hollywood studios charged $60 per video, while demand typically fell sharply a few weeks after release. Consequently, Blockbuster could not justify purchasing more than ten copies of a movie, leaving many customers frustrated at being unable to rent the latest videos.

To solve this dilemma, Blockbuster proposed giving movie companies a share of the revenue from rental sales to secure a lower upfront price for videos. Blockbuster was able to break even on a video more quickly, and able to purchase more copies to satisfy demand—ensuring high standards of convenience for customers. The movie studios also benefited from increased tape sales and added revenue streams. By turning a supply chain into a revenue chain, Blockbuster had satisfied the movie companies, the customer base, and its own bottom line.

In practice

• For this idea to work for your company, the incremental revenue generated by additional units must be less than the cost of producing them. 

• Administrative costs should be low so they do not use up the increased profits from the scheme. 

• If there is a high degree of price elasticity in your market, the lower upfront purchasing costs negotiated through revenue sharing should be used to lower prices, to stimulate demand. 

• Use sharp negotiating skills when deciding how much revenue to share with the supplier. If production costs are low, a supplier may accept a lower revenue share than you anticipate. 

• Employ reliable market research to gauge consumer demand when deciding how many units to purchase, following a revenue sharing agreement. The new lower price can make it tempting to over-purchase.