This article introduces some of the basic risks to consider before crowdfunding
What to think about when crowdfunding
Choosing a platform
Getting everything ready
The price of innovation
Shipping and fulfillment
Set Realistic Goals
Make a realistic estimate
What will you do if you succeed?
Crowdfunding has become a popular method of building capital for a few key reasons. The obvious financial benefit is that crowdfunding allows a business to collect a portion of sales prior to actually manufacturing a product. Additionally, crowdfunding can be a relatively safe way to test the market for interest before an official launch; a successful crowdfunding campaign can even entice investors during initial rounds of seed funding. However, a poorly managed crowdfunding campaign can be disastrous for both financial reasons and for the ill-will that can be generated with consumers. This article intends to address some key factors in managing a successful crowdfunding campaign and help businesses avoid some of the most common crowdfunding pitfalls.
With the early success of Kickstarter, several platforms have sprung into existence to offer alternative crowdfunding options with their own slight differences. While we recommend Kickstarter in most cases, an alternate platform may be the better choice in specific circumstances. The following list introduces only the most widely known crowdfunding platforms:
One of the most commonly overlooked expenses involved in crowdfunding a project is the collection of assets required to maximize the success of the campaign. The most successful crowdfunding campaigns include several assets that build confidence in potential backers:
These assets are all must-haves to build out a successful campaign. In general, it is reasonable to project a 5 figure budget just to produce the visual assets required for launch. The required assets listed above serve a combination of two goals that are crucial to crowdfunding success:
In addition to building trust and excitement through the campaign itself, an extended promotion plan prior to launch can lead to significant day 1 traction and propel the rest of the campaign forward. Documenting and sharing the build process, gathering community feedback, and developing a network of potential backers takes time and energy but allows for a strong launch. If a campaign is 30 days long, the window to promote starts well before the 30-day timer.
Understanding the true cost of manufacturing a product allows for the creation of realistic pledge tiers and funding goals. When determining manufacturing costs prior to launch, there are some important factors to consider that are commonly overlooked:
There are 2 common methods for accounting for fulfillment costs. The first is to calculate shipping costs to various zones ahead of time and bake the averages into the pledge tiers. This is very effective for building excitement because the campaign can be advertised with “free shipping” however, since most crowdfunding platforms are global, shipping costs can get out of hand in a hurry. With this in mind, charging shipping after the campaign is becoming very popular for creators. Shipping costs can be collected in a pledge manager such as BackerKit. In addition to the shipping cost, taxes are important to consider. Many EU backers will not support a campaign unless it is EU friendly – meaning that the shipper is responsible for covering the vat tax rather than the backer. If a campaign picks up a lot of backers around the world, it may become necessary to source one or more fulfillment centres in target countries and split the shipment from the manufacturer to the multiple fulfillment centres. Find out how an agency evaluates shipping methods >
The two most important questions to consider when crowdfunding are: “What should the funding goal be?” and, “What should the reward tiers be?” To answer the first question, it is important to understand what the funding goal should and should not cover.
Costs that should be taken into account when determining the funding goal include all necessary costs to take the project to the next step and no further. Some examples of applicable costs include:
Any costs that went into preparing for the campaign and costs that go into developing the business should not be included in the goal. Crowdfunding serves to help generate required manufacturing costs. Starting a business still requires personal investment. Some examples of inapplicable costs include:
In short, the funding goal should cover only the costs required to manufacture and deliver the product. While baking in a profit or attempting to make up sunk costs can be tempting, setting the funding goal too high means that the campaign is less likely to successfully fund. After a successful campaign, the landed cost of the product should be covered and there should be enough excess inventory to make up sunk costs and generate additional profit after the campaign is closed.
Setting the reward tiers is a much more complicated challenge. Every campaign should include a rewards tier where the backer receives the product for a fixed fee (lower than the MSRP), as well as a “tip jar” starting at $1 with no pledge reward. The $1 pledge level allows cautious backers to show some support and keep an eye on the campaign. Many $1 backers add additional funds close to the end of the campaign or in the pledge manager. Beyond that, the options are wide open. Limited early-bird reward tiers are a popular option for incentivizing early pledges with a discount. Premium rewards tiers can also be included as a way to offer additional products in the campaign. For higher rewards tiers, we caution against offering unrelated add-ons requiring additional investment. Offering a T-shirt may seem like a good idea but if only a few backers select the rewards tier that includes the T-shirt, the extra funds generated by the increased pledges may not cover the minimum manufacturing run for the add-on. To minimize risk while offering improved value for higher pledge rewards, consider offering specialized incentives that do not need to be manufactured. From creative projects, signed copies of the finished work are a popular option. For innovative projects, a 1 hour meeting with a designer may entice a backer to raise their pledge.
A stretch goal is a reward that can be offered to backers when a campaign far surpasses the initial funding goal. Stretch goals can be free with any pledge, an add-on for purchase, or a combination of the two. One of the most effective methods of planning stretch goals is including minor improvements that make the core product more appealing without creating too many additional expenses. A stretch goal can include anything from improved product packaging to higher quality materials. Carefully examine the quantity discounts that come with a larger manufacturing run to determine which goals can be paid for with the savings generated by producing more of the core product.
Setting a realistic manufacturing and delivery schedule is a key to maintaining backer trust. Communicate with the manufacturer to develop a schedule and communicate that schedule clearly to the backers. Leave plenty of additional time in the schedule to allow for unexpected delays and pay attention to external factors that could cause slowdowns. For example, if a manufacturing window overlaps with Chinese New Year, manufacturing can be delayed by 2-3 months. In the end, it is always better to announce a conservative schedule and deliver early than to miss the mark and deliver late.
Once the campaign is complete, the product is in-hand, and the pledge rewards have been fulfilled, then what? A crowdfunding campaign is not a business model; a crowdfunding campaign is one of the first steps towards activating a business model. With this in mind, it is important to go into crowdfunding with a clear goal in mind for where the project is headed. Will a warehouse be required to store the product? Will a distributor be required to move the product? Will the product ultimately be sold in-store, direct to consumer, or some combination of the two? To answer these questions, we recommend consulting a business expert to develop a business plan and determine the right fit for your business.