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If you’re developing a product to sell, you need a way to ‘get it out there’. This can involve significant expenses, like certification testing and manufacturing of a minimum order quantity. Crowdfunding is a popular way for small businesses (including hobbyists) as well as large companies to reach new customers and help cover the upfront costs of releasing a new product. I have run several Kickstarter campaigns and have been involved in multiple other campaigns – it’s a stressful but potentially rewarding process that could help bring your product to life.
When you boil it down to its essence, a crowdfunding campaign is a fancy pre-order system with some built-in marketing. The backers/contributors of the campaign don’t own any part of your company, intellectual property, or other rights. They are just placing orders for the product in advance of production, typically for a significant discount.
Launching a small business that sells an electronics-based product would involve you (or your company) designing the product, manufacturing an initial run and then launching it on your website. It can be very daunting for a new company to go down this route for several reasons, primarily:
- Upfront costs
- Getting the word out that your product exists
- Driving traffic to your website
There’s no point launching a fantastic product if nobody knows it exists! Marketing then becomes an indispensable part of your campaign and can make or break your product, regardless of how good the product itself is. History is full of examples of technically inferior products being far more popular than superior products. This all boils down to good marketing. Some of that is merely letting people know the product exists, and some of it is telling people they must have that specific product. Apple is an excellent example of a company with great marketing, whether you’re a fan of their products or not. On paper, their products are highly priced, and there are technically superior products available for less, but Apple’s marketing power is enormous; therefore, their products sell very well. Now, if you’re not a company the size of Apple, you probably don’t have the marketing budget, reach or contacts that it has, so how do you get the word about your product out there?
Getting blogs/social media/news sites to talk about a new product from a small company is hard, especially if that product is only available on your website. If your company is a bit larger and already has a customer following, this can be easier to accomplish but would still take significant effort. By crowdfunding your product, you can give a blog/news site something more to talk about than yet another product from yet another small company. Having a well-written campaign with an excellent video and photos can make you stand out from the crowd when it comes to the editors of these sites looking at your product.
Even if your project budget covers the cost of production and marketing, crowdfunding could be yet another marketing tool for you. Having your product be successful on a crowdfunding platform can provide ‘social proof’ marketing by showing that your product is popular, thus encouraging potential customers to buy it because all these other people have done so. It also allows people to feel emotionally invested in the product by helping bring it to life, and those customers can become brand evangelists for you in the future, helping with the marketing of your future creations.
As I see it, there are two primary use cases for utilizing a crowdfunding platform for your product launch. I will note here that in this series of articles, I expect that you have a product pretty much ready to launch – you’re launching a product, not an idea. Crowdfunding is not the place to launch an idea and make it into a physical product, these projects almost always fail to gain funding and for a good reason – people want the thing, not the process of developing that thing.
You’ve spent months/years putting all your (or your employees’) heart and soul into the development of this product. It’s been prototyped, it’s gone through EMC pre-compliance and it’s been through some user testing, but your manufacturer needs you to order a minimum of N? units, and that’s beyond your budget. Alternatively, perhaps it needs RF, electrical safety, or some other certification and/or an injection mold or two, all of which are very expensive.
Increasing Sales Reach
If you have your expenses and first manufacturing run covered, you might want a faster return on that investment. You use the crowdfunding site(s) to gain sales from the customer base already on the crowdfunding platform. Some platforms can give you 30%-70% of your funding goal, despite your best marketing efforts, purely from users seeing your project on the platform, rather than being directed there via your efforts. Combine this with your marketing efforts, and you can make your product launch a much bigger success.
It’s not free to crowdfund, everyone wants their cut of the revenue, and you’ll have quite a bit of labor expense just to handle the campaign itself.
Before you even get to launch, you may need to hire someone to create the crowdfunding campaign’s video if you don’t have the skills to do it yourself. The videographer/editor could be anywhere from $500 to $5000 or more depending on whom you choose to help out and what they are giving you. You’ll also need some professional photos and graphics for your campaign which could cost another $500-5000 if you are not skilled in these fields. You might think you can wing it on these, however, the more professional the campaign videos, photos, and graphics are, the more likely you are to be successful. The video and photos provide the potential customers their first impression of you and your product.
You will also need prototypes to send out for marketing purposes if you want to make an impact. Expect to be making at least 20-30 prototypes to send out.
The platform will end up receiving about 8%-12% of your funding amount comprising their fees (about 5%) and payment processing fees (3%-5% + a set charge per payment). If you’re on IndieGoGo or Kickstarter, you might end up handing over another 2%-10% to a company like BackerKit to help with managing the campaign after it’s finished – just dealing with shipping hundreds of units can be a nightmare.
For labor, you’re probably going to spend a month before you launch creating the campaign, and doing pre-marketing (contacting news sites/blogs). Additionally, you can expect to do very little else but marketing and email during the 30 days your campaign runs. If you have staff, expect most of them to be doing this full time as well.
Post-campaign, you will probably be doing a lot more customer service than a typical web sale, as it’s a pre-order and people will want to know the status of their order. Some will email you incessantly. You also need to deal with the inferior backer tools that IndieGoGo and Kickstarter provide if you utilize their platforms. Customer service can add hundreds of working hours of labor compared to the same volume of webstore sales.
To sum it up, unless you can do high-quality graphic design and video editing in-house, you can expect to need $2,000-$12,000 upfront to get your campaign launched. You’ll lose around 12% of any funding gained to the platform, and it will cost you two months of wages before/during the campaign and potentially 1-3 hours per order for customer service/data management post-campaign.
Pros to Crowdfunding
Despite the costs, there are some great reasons to consider crowdfunding.
- Make more pre-sales than you’d otherwise be able to.
- Built-in marketing through the platform.
- Blogs/news sites may be more likely to write about your product if it’s on a crowdfunding platform.
- Guarantee you have the money to launch your product.
- It can be quite entertaining!
Cons to Crowdfunding
- A significant amount of effort to create/launch/manage a campaign.
- Typically expected to offer the product(s) at a significant discount (eats into margins).
- Some platforms (IndieGoGo mainly) are considered fraudulent by many banks, and the customer’s funds will never make it to you. Likewise, they can have low trust in some online communities.
- It can be extremely stressful!
There are many other pros and cons to crowdfunding, some of which are platform specific and some of which will be project specific. IndieGoGo, for example, offers a funding mode which allows you to keep the funds even if you don’t reach the goal. If you are using crowdfunding to raise funds to launch your product, I wouldn’t recommend that. If the campaign doesn’t reach the goal, you’ll still need to raise the additional capital to manufacture the product to fulfill the orders that were placed. Even if you use the typical ‘all or nothing’ campaign funding, you can still get caught short with unexpected expenses or project delays that eat through your budget.
Crowdfunding a new business or an existing side business can help you immediately jump into the project as a full-time job, potentially with paid staff to help you out. Depending on your circumstances, this alone could be worth ignoring the drawbacks and launching a product you’ve been working on through a crowdfunding campaign. If you have an existing business, it could allow you to grow your business far more rapidly than you could otherwise.
IndieGoGo, in particular, has excellent opportunities for a successful campaign to proceed to venture capital funding. If you want to go down the venture capital route, a highly successful campaign on the right platform could give you the right connections to make that happen as well as provide a clear demonstration that your product is in demand.
If you are looking to distribute your product through vendors such as Digi-Key or Mouser, using Crowd Supply as your platform can give you the introductions you need to become a supplier. If you feel a distribution model is key to making your business continue to thrive, it could be worth the effort to run a campaign.