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.
