What is crowdfunding and why should you use it?

Welcome to LaunchBoom! We’re experts in all things crowdfunding here to dispel any myths or misconceptions you might have about it. But, before we’re able to really dig in, you have to understand the most basic question of all–what is crowdfunding?

From Kickstarter to GoFundMe the term “crowdfunding” is a general term for raising money from a large group of people. However, there are four primary types of crowdfunding: reward, donation, debt, and equity. We use “reward-based” crowdfunding for our product launches, so when I say “crowdfunding” I am referring to this type.

Here’s how crowdfunding works in a nutshell:

• Campaigns are created on either Indiegogo or Kickstarter.
• They must have a duration that you are accepting funds from 1 to 60 days.
• Campaigns must have an external goal of funds they want to raise during the live campaign. If you hit that goal, you become funded.
• Campaigns make their new products available for pre-order (typically at a discount).
• When someone pre-orders the product during the campaign, they’ve technically pledged for that reward and have become a backer.

Even though we treat crowdfunding like a storefront, neither Indiegogo nor Kickstarter are technically stores. Both platforms actually have disclaimers stating this before backers checkout. This can be a little disconcerting for some new visitors to the platforms, but in general, it’s not an issue. We actually see much higher conversion rates using crowdfunding platforms vs. launching on one’s own eCommerce site.

With the basics out of the way, let’s talk about why crowdfunding is the most effective way to launch physical consumer products today.

Reason #1: Tap into a massive, growing marketplace at a fraction of the cost of traditional product launches

According to similarweb.com both Kickstarter and Indiegogo combined receive over 25,000,000 unique visitors per month on average. That’s an extremely large group of potential customers to tap into.

But it’s more than just a large group, these are vibrant communities that are constantly looking for new ideas to back and get behind. That translates to a group of people that are ready to spend money on your product.

Knowing the crowdfunding audience

When describing this market, co-founder Tod Dadourian, said it best: “Backers on Indiegogo and Kickstarter just want cool stuff, at a discount, before anyone else.” Let’s take this description and apply it to the famous Product Adoption Curve. This curve represents the different groups of people that adopt new technology, with the middle group being the mass market.

I put crowdfunding backers in the Innovators & Early Adopters categories. These are the people that are willing to take more risks with the products they buy. That’s because they are largely motivated to be the first to know about something. We all have those friends that knew about that new popular thing “before it was popular”–well, that friend is like crowdfunding backers.

How to use that audience

So, we know that there’s a massive audience on crowdfunding platforms. Now we need to know how to actually tap into that audience. It’s more than just putting your crowdfunding campaign live and watching the money roll in. It also takes acquiring a high spot in the rankings of the platform.

Each platform allows its community to browse projects that are live. They rank the projects on a number of factors, but it’s largely driven by project popularity. Meaning, if you are able to drive a lot of sales early on, you are much more likely to have higher placement in the rankings and ultimately, more traffic to your campaign.

Tapping into this community allows your marketing dollars to go much further because you don’t have to pay anything additional for this traffic (besides the 5% platform fee on funds raised). Across all our campaigns, we find that on average, 28% of funds raised come from organic traffic from the crowdfunding platform. That’s a huge lift that definitely makes up for the 5% fee you’ll be paying the crowdfunding platform.

Reason #2: Validate a new product and improve it with customer feedback

According to the Council of American Survey Research Association: “US businesses alone spend 6.7 billion dollars each year on market research and 18.9 billion worldwide.”

Crowdfunding campaigns are a low-risk and low-cost way to do market research and prove product viability. Some valuable questions you can ask and learn the answers to are…

• Which product positioning resonates the most with the market?
• Which audience is the most interested in my product?
• What questions/concerns does the market have about your product?
• How much does it cost to acquire a customer through digital advertising?
• What price is the market willing to pay?

We’ve seen customers ask questions that lead to product breakthroughs. There have been advertising campaigns that gave us insights on how to improve the product positioning. We’ve seen the price of a product change based on market feedback. All of the information you gather during your campaign will lay the foundation for the future success of your product and for your company.

The beauty of crowdfunding is your community of backers. They know your product is improving and are willing to invest their ideas, money, and social reach to ensure its success. These early customers can be your most loyal fans while also giving you great feedback to make your product and business better.

Reason #3: Generate more revenue with less risk

Traditional product launches are incredibly risky. Entrepreneurs invest a great deal of time and money to develop their product. They go through a manufacturing run so they have inventory. They spend a massive amount of money on their marketing strategy. When they go to launch, they pray that the sales come in. If not, they’ll be sitting on thousands of units (and dollars) of inventory.

Crowdfunding gives entrepreneurs a different, less risky path. All the entrepreneur needs is one functional prototype. Seriously, that’s it. With that prototype, an entire crowdfunding campaign can be built.

Since backers are pre-ordering your product, you’ll receive all the money before you go to manufacture. Ideally, you’ll be able to place a larger volume order with your manufacturer because of the success you’ve had through crowdfunding. Larger volume orders usually decrease the cost per unit and increase your margin. This is a beautiful model because companies can leverage economies of scale by capitalizing on pre-sale orders and reducing their financial risk.

Reason #4: It’s not over after the crowdfunding campaign ends

When you launch your crowdfunding campaign, you can initially have it live for up to 60 days on both Indiegogo and Kickstarter. But your crowdfunding campaign is actually far from over after the “funding” portion of your campaign ends.

You can continue to drive pre-sales using Indiegogo InDemand and post-campaign survey software (like BackerKit or CrowdOx). These tools are great because they allow you to (1) continue to pre-sell your product after your campaign ends and (2) upsell your backers additional products.

Reason #5: Better position yourself for bigger deals

Once you deliver a successful crowdfunding campaign, you have proven that there is a high demand for your product. I’ve seen this significantly benefit entrepreneurs and help them close bigger deals for their businesses. They’ve connected with distributors & retailers, received licensing opportunities, or raised capital through debt or equity.

You can leverage your success for future press as well. Crowdfunding is social by nature. Your success will be disseminated across social media by your newfound community and will always live on the crowdfunding platform. We’ve helped our clients use this credibility to continue building their brand post-campaign.

Let’s start building your campaign

At this point, you now understand what crowdfunding is and why it’s such a powerful strategy for launching your product. It offers a new, better approach for entrepreneurs that requires less risk and capital than traditional product launches.

If you’re still not sure if crowdfunding is right for you and your business, don’t hesitate to reach out to us. We’re here to answer all of your questions and make sure you get all the knowledge and confidence you need to get started.