Evaluating Wholesale vs. Revenue Sharing for Manufacturers

In today’s business landscape, manufacturers face a pivotal decision regarding revenue generation. Should they charge for their technology platforms from the get-go or offer them for free in exchange for a share of profit, better known as royalty? Two of the biggest automobile companies in India, Tata and Hero MotoCorp, are examples of both revenue models. Tata follows a wholesale revenue model, while Hero follows a royalty method. As a result, the revenue numbers of both companies are quite different. Tata recorded a revenue of ₹70,800 crore for its commercial vehicle division in FY23, with a growth rate of 35.4%. On the other hand, Hero reported revenues of ₹31,500 crore in FY23.

Choosing between wholesale and revenue-sharing models has benefits and caveats. It is crucial for manufacturers to understand these models and decide which best fits their revenue model. This is especially true for OEM or Original Equipment manufacturers as they navigate the competitive environment and strive for profitability. 

The Wholesale Model

Manufacturers charge a fixed price for each technology installation in a wholesale model. The primary advantage here is the immediate revenue it generates, as the OEMs are paid upfront and have full control over their pricing. This approach is straightforward and aligns with the traditional pricing strategy, where the selling price is calculated by adding a markup to the cost of production​.

For example, if a product’s production cost is ₹1000, an OEM might add a 20% markup, resulting in a selling price of ₹1200. This model is simple to implement, and the manufacturer secures predictable margins​. However, this approach often overlooks market dynamics, customer demand, and competitors’ pricing, potentially leaving profits uncaptured if customers pay more for a product with more demand than supply.

One drawback of the wholesale model is its potential limitation on long-term revenue growth. Once a manufacturer sells their product, they may lose the opportunity to capitalise on their customers’ continued use of the platform or technology. However, in fiercely competitive markets, this model can inspire OEMs to innovate and offer added value that differentiates their product from cheaper alternatives, potentially leading to higher profits. However, it still doesn’t mitigate the aforementioned challenges. 

The Revenue Sharing Model: A Key For Long-Term Gains

In contrast, the revenue-sharing model is a more modern and flexible strategy that allows the OEM to access the technology platform for free but share a portion of the profits from sales or services​. This cooperative arrangement incentivises the manufacturer, as well as the technology developer to work closely together to optimise sales and performance, thus fostering a sense of “coopetition.”

This model can lead to more significant long-term revenue opportunities as the manufacturer earns a share of the profits or royalty even after the initial sale. Major players in the energy and automotive industries often employ this strategy, offering their services to customers and partnering with technology developers to share profits generated from upgrades, services, or additional features sold post-installation​. One such example is Tesla. It provides regular updates to its customers, which helps it earn revenue from a car even after it’s sold in the market. 

Revenue-sharing models align well with value-based pricing strategies, where prices are set based on the product’s perceived value to the customer rather than its cost. In this scenario, OEMs can charge a premium for products that provide unique benefits, thus enhancing profitability. However, this strategy requires a thorough understanding of customer needs and preferences, which demands significant market research and close collaboration between OEMs and technology providers. 

Choosing the Right Revenue Model

Choosing the right revenue model can significantly affect an OEM’s profitability. However, it’s not that straightforward. There are several factors OEMs need to consider for a sustainable future and high profitability. 

Market Dynamics

A wholesale model may suffice if a manufacturer operates in a stable market with minimal competition. However, in rapidly evolving markets, where customer preferences shift quickly, a revenue-sharing model allows for greater flexibility and continuous profit generation.

Product Lifespan and Aftermarket Services

Revenue-sharing models benefit products with long lifespans, such as industrial machinery or aircraft. These industries thrive on long-term service contracts, which ensure a steady income from maintenance, repairs, and upgrades.

Customer Expectations

Customers today expect more than just a product. They want an ecosystem of services and continual upgrades, which a revenue-sharing model is better equipped to deliver. Value-added services can enhance brand loyalty and customer retention in the long run​.

Going Back To The Drawing Board

The choice between a wholesale and revenue-sharing model completely depends on the OEM’s long-term goals, the nature of the product, and the market conditions. While the wholesale model offers simplicity and immediate revenue, the revenue-sharing model promises more significant potential for long-term gains and stronger relationships with customers and partners. Forward-thinking OEMs are increasingly exploring revenue-sharing to fuel sustainable growth in an ever-competitive market. Moreover, the market landscape can change quite significantly shortly.

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