Creating a Realistic Budget for Your Crowdfunding Project
We’ve all heard the success story: an amazing idea goes up on a crowdfunding platform, quickly takes off, and raises far more than it asked for. But even if you find yourself with a successful Kickstarter or Indiegogo, there’s one last critical element that doesn’t always go well: actually delivering on it.
In fact, Kickstarter itself hired an investigative reporter to look into one of its projects that raised millions but failed to deliver on a pocket sized drone 12,000 backers signed up to receive. In the end, despite what may have been the the company’s best wishes, their too optimistic projections left backers deeply disappointed and earned the drone’s creators damage to their reputations that can never be repaired. Their failure is a warning to make sure that you represent your idea in the most honest (and realistic) way possible.
Along with realistic goals, maintaining a realistic budget may be the least sexy part of a crowdfunding project. But it’s the part that, if done correctly, will make it possible to finance the inspirational parts.
And while it may not be possible to isolate every single cost associated with a crowdfunding campaign, there are some general areas that you can drill down to understand exactly how you will be delivering your product, and rewards, to backers.
Here are some general areas you should keep in mind…
- Actual Project Costs
- Fulfillment
- Marketing
- Fees and Taxes
Actual Project Costs
What will it take to complete your product or project? If it’s a film, that means including all of the labor and materials associated with producing it. If it’s an online platform or app that will include design, coding, marketing, and promoting to get it launched. If it’s a physical product, that will include production and delivery costs.
Regardless of what type of project you’re funding, you may want to look at other projects similar to yours to get a sense of how they setup their rewards vs. project costs, and how they explain the project costs.
Fulfillment
Match your rewards to the cost it will take you to fulfill them. Lower reward levels, especially, should require a minimum of effort. If someone’s backing at a $1k or $5k level, for example, it’s ok to budget for more costly fulfillment, but ideally at levels of $25 or less you’ll want the fulfillment or delivery to be very simple, and the costs clear.
Speaking of which, don’t forget about shipping costs. This is something that many first time entrepreneurs who are trying crowdfunding for the first time forget, and it can be a very costly mistake. In particular, international shipping can quickly get expensive, and limiting the rewards available to backers outside of your country or making it clear that they’ll cover shipping costs is a critical part of budgeting correctly for fulfillment.
Marketing
One of the most difficult costs to project in running a crowdfunding campaign is marketing.
Often the cost of engaging with backers or potential backers is significant, and not always accounted for in salary projections. This is common with a new company or product where people are putting in sweat equity in exchange for a potential job in the medium to long term. As a best practice, it is a good idea to value each individual’s time by setting a rate, and even if the time is donated, look and and set a line item invoice or rate of actual cost for the effort. This will help everyone stay focused and clear about their level of contribution and its value.
Additionally, at a minimum you should have good quality marketing / promotional materials — including things like images, copy, sample art work or product mockups, etc. You may have to bootstrap some parts of your campaign, but you’ll want to make sure people who are considering backing you can get a clear, beautiful picture of what they’re buying into.
Fees and Taxes
Although they may seem small, platform and payment processing fees can turn out to a very large expense. Make sure to read the fine print on the platform you choose to see what final platform charges will be, and when they’ll be taking them out (some calculate them later in a mass amount while others automatically pull the 2–5 percent whenever a backer is charged). Payment processing varies depending on method, but Paypal, Amazon, and credit cards are likely to take 2–4 percent.
Another thing you’ll want to keep an eye on: taxes. You may be subject to a local gross receipts tax, or there may be state or federal taxes applicable depending on your product. It’s a good idea to run a mockup of a successful campaign so you can see all of the costs in total and appropriately price your rewards. And baking in contingency costs should be something you discuss as well, since there is a good chance there may be some unexpected changes to how you run your campaign and/or deliver a product.
Creating a budget may appear overwhelming and it may cause you to rethink your project, but it is absolutely essential that you have an honest view of exactly what each phase of your campaign will cost. Inspiration and optimism are all part of creating something new and dynamic, but in the the budgeting phase of your campaign a cold, clear eye is what it takes to be successful.
WeGreenlight.com is a platform to help you validate your ideas, get feedback, and launch with early adopters. Join us and let’s help you launch your idea successfully.
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