Revenue sharing in bundling: how does it work?

Revenue sharing in bundling: how does it work?

The goal of bundle partnerships is to make money for digital merchants and mobile operators. For merchants, this comes from new users who can be monetized via premium accounts or ad revenue. Mobile operators on the other hand generate revenue by upselling users to more expensive service packs, increasing their mobile data consumption and stickiness.

The predominant model for these partnerships used to be something called a minimum guarantee (MG) approach. Under the MG approach, the mobile operator used to pay a flat fee to the merchant and acquired a certain number of discounted licenses to the service.

It’s important to note the words “used to be” as the minimum guarantee approach is becoming increasingly unpopular. This is because with the fixed payment logic, merchants and carriers are not aligned in their interests on what the bundle partnership should achieve.

For merchants an upfront payment looks great at face value, but their success is measured based on new users and their life-time value. With the MG approach, not all licenses sold are converted into new users and after the trial period is over, a majority of users that do sign up churn out. As a result, the lifetime value of users from an MG deal is lower than acquiring those users directly.

For carriers the goal of a bundle is to get existing subscribers (and competitors’ subscribers) to upgrade their telco service pack; whether they actually activate their free trial with the merchant does not matter to the carrier. They also have no interest in continuing to promote the service after the trial period is over, as the goal is a one-off upgrade of the existing telco service pack, which leads to the churn described above.

So while initially the minimum guarantee approach might look good (merchants get money, telcos have an extra incentive to offer to their users), the end result often is not satisfactory. Merchants get new users but high churn and telcos start their “upgrade subscribers” campaigns with a handicap, having already disbursed a substantial amount of money even before investing into marketing.

So how to do it better? Instead of the minimum guarantee logic, the model of revenue sharing logic has emerged. Rather than paying a fixed amount of money for a fixed amount of licenses, telcos only pay the merchant in case a user activates the bundle offer. Under this approach, the interests of both parties are aligned:

  • The carrier pays the merchant for each new user brought on board through the bundle deal; settlement happens when a user has actually upgraded their service pack and the ROI is guaranteed to be positive
  • Once the free trial runs out, revenue sharing for carrier billing means the carrier has motivation to continue promoting usage of the service since they are also making money from it

This approach also adds more flexibility to bundle partnerships since the free trials no longer need to be a fixed length and the bundle logic can be applied to other telco offerings beside service packs, such as spending X amount of mobile data or giving out a free trial for high-ARPU users to retain them.

While the minimum guarantee approach can only be used for postpaid subscribers (otherwise calculating the MG would be impossible), the revenue sharing approach can also be applied to prepaid users. Prepaid SIM cards account for 95% of mobile users in emerging markets and provide the biggest opportunity of growth for digital merchants in these countries.

In summary, the revenue sharing approach allows both merchants and telcos to “do more” with a larger user base over a longer period of time: meaning that instead of quick-fix minimum guarantee setup where the partnership only lasts for 6 or 12 months, both parties can continue working and making money together over significantly longer periods of time.

If you’re a digital merchant or carrier looking to bring more flexibility and scale to your bundle partnerships, make sure to check out our bundling platform.