For many venture capitalists seeking investment opportunities, businesses that offer frequent returns on a revenue stream will often be the most attractive. This is because a predictable and recurring stream of revenue will result in a higher return on the lifetime value of customers, while also affording optimal leverage on aspects like initial marketing costs. While some may believe the more lucrative a business model the better the investment capacity, this isn't always the case.
Business Type Can Determine Future Investments
To fully understand just how large a role a recurring revenue stream can play in future investments, one must take a closer look at how business type can affect revenue predictability. High-end travel businesses aiming at a wealthier market have the capacity to earn quite a bit of money selling vacations. While a single trip may cost upwards of $5,000, customer acquisition could amount to as much as $1,000 per customer, which can diminish quite a bit of the gross margin. Because a substantial vacation is not likely to be a frequently purchased item, repeat sales are not as reliable. The relatively small buyer base can also have an impact on investor confidence, thereby resulting in a less attractive opportunity.
Conversely, a business offering mobile phone service to consumers will incur far less profit per sale, but offer a more reliable recurring revenue model. Not only will customer acquisition be much lower than in the previous example, mobile phone service also appeals to a much larger customer-base. This business is also less likely to be affected by a waning economy, which will greatly decrease the likelihood of exorbitant vacation purchases during times of economic instability. Customer retention is also greater, assuming customers will choose to stay with their current service provider over a period of time.
Predictability Drives Future Profits
The above illustrates just how important revenue predictability is to increasing investor confidence and securing the capital a business needs to thrive. While it would seem that the more profitable business model would offer a greater opportunity for future earning, this isn't always the case. A business offering luxury goods and services is less likely to induce repeat sales due to the relative expense of the items offered. Most investors are more concerned with the long-term earning ability of a business, and unstable revenue streams often can't be sustained as long as more realistic pursuits.
In this event, subscription-based business models offer the highest level of revenue predictability. Contracts are a great way to ensure your revenue stream remains profitable, especially when providing consumers those items that are considered necessary to daily life. An expanded customer-base is also important for investors seeking a stable business model, and this simply isn't afforded by luxury businesses catering the needs of the exceedingly wealthy.
Secure the Investment You Need With the Right Business Model
An influx of capital is crucial to get a business up and running, and securing investors is the typical method for providing a new business those must-have resources. Establishing a business model that affords a reliable revenue stream can help win investor confidence by increasing the likelihood of customer retention. Companies like ServiceSource can help provide help and consulting on managing the business lifecycle and creating a viable recurring revenue model.