I will explain it to you with a simple example, assuming one is investor partner and other is managing partner.
Assume you and your friend are working on a partnership, you purchase a item for ₹60 and sell it to ₹100. Here ₹100 is revenue and profit is (100–60) ₹40.
- PROFIT SHARING MODEL
As profit is ₹ 40, you and your partner both will share this in the percentage as decided beforehand. So, if its decided that you will get 75% and your partner will get 25%, you will get 75% of ₹40 that is ₹30 and your partner will get 25% of ₹40 that is ₹10.Interestingly,
A. Suppose the capital invested in your business is managed by your partner only, he will get only ₹10 at the end of the day for ₹60 that he has invested in business, while suppose, if you are just managing partner, you will get ₹30 here only for managing business.
B. Incase you are able to sell that item for ₹50 instead of ₹60, you will incur a loss of ₹10, that will be bear by that partner(s) only who are investing money.
So, In this model the risk of profit or loss is entirely on the person investing his money in the business. Also, all the uncertainty of the business is mainly taken by the person investing money in the business, so generally that person takes higher split in case of profit sharing model to hedge his risk of business.
- REVENUE SHARING MODEL
As revenue is ₹100, you and your partner both will share this in the percentage as decided beforehand. So, if its decided that you will get 75% and your partner will get 25%, you will get 75% of ₹100 that is ₹75 and your partner will get 25% of ₹100 that is ₹25.Interestingly, you can see that if in above model your partner is taking care of all investments, He is investing ₹60 for the article and getting ₹25 in return so clearly it will not work out. It may work out for 25–75 split in revenue.
Also, in case of loss, this model is disaster for the partner investing his money in business, in previous case, the other partner is not getting anything as no profit. While in this case the partner who is not investing any money will still get the percentage in revenue as income, while the person investing money in the business will incur additional losses.
Investing partner = Purchased Item at ₹60 , sold at ₹50, loss of ₹ 10, assuming 75–25 revenue split.
Investing partner will get 75% of ₹50 = ₹37.5 ( loss of ₹60 – ₹37.5 ) = loss of ₹22.5 , while other partner will enjoy income of ₹12.5.
Profit sharing model is more justified way of distribution of income but again, many a times people may fudge profit-loss data and thus, many govt organisations and public-private partnerships run on revenue sharing model.