In the early days of crowdfunding, launching a campaign was, in itself, a novelty. Getting press was easy. Driving people to the campaign was straight-forward. The explosion of crowdfunding campaigns is a blessing: there are more exciting projects today than ever. It is also a curse: Getting heard over all the noise is impossibly hard.
As the project creator, you have the benefit of not having to spend tons of money on creating the products before you launch, but that is a small consolation. Realistically, crowdfunding now is harder than a normal product launch. A few huge fiascos — such as Coolest Cooler and, well, one of my own — has made the general public more wary of what it means to back a campaign.
So, how do you sell a product — or, technically, the idea of a product that will exist in the future — to a skeptical audience? You bring your A game, that’s how.
Let’s talk marketing metrics
Outside of crowdfunding campaigns, marketeers operate with a few important numbers — two of the most important ones being your Customer Acquisition Cost (CAC) and the life-time value of the customer (LTV).
For a one-off purchase, where your customer will only ever make one purchase from you, and where repeat business is rare, your LTV is the same as the price of your product. An example here is a mattress manufacturer such as Casper mattresses. Once you’ve bought your $500 mattress, you’ll probably have it for a decade. For a purchase that is recurring (say a meal delivery service such as Blue Apron, or a content as a service product like Netflix), your LTV is the average spend per customer. If the average customer stays for 3 years and pays $14.99 per month, the LTV is 3*12*14.99 = 539.64.
It’s worth noting that in the example above, the LTV is similar; Casper’s LTV is ~$500, and Netflix’ LTV is ~$500. In theory, both companies can afford to spend the same amount of money to attract a new customer. In practice, the two business models are pretty different — Netflix spends billions of dollars on content production and acquisition but has low delivery costs, whereas Casper’s R&D budget is limited but the unit economics are high — but let’s focus on the CAC/LTV for now.
As a rule of thumb, your CAC to LTV ratio should fall in the 1:3 ratio. In other words, if you are selling $500 mattresses, you can expect to spend $167 to acquire a new customer.
Imagine that Casper is spending money on Facebook cost-per-click advertising. In other words: they bid a certain amount of money for each click for a targeted Facebook audience. Mattresses is a highly competitive market, so let’s say they spend $8 per click. However, Casper is also getting a 5% conversion rate, which is pretty decent. That means that for every 20 people who click on the ad, they make one sale. That also means that for every sale, they had to spend $160 on advertising. That gives you the CAC.
You see where this is going. To improve their CAC/LTV ratio, they would have to drive down the cost per click, drive up the average conversion rate, or increase the average value of the sale.
How does this apply to crowdfunding?
Crowdfunding is a sales channel — a method for you to collect someone’s money in exchange for a promise to deliver a product later. The quality of your product and your crowdfunding page is what will drive your conversion rate. (Is the product good? Does the product solve a real problem? Is it believable that you will be able to deliver?)
Crowdfunding is not a marketing channel. Even if you create the best crowdfunding page in the world, it’s unlikely that people will find it. Or, put differently, a 100% conversion rate with zero customers is still zero sales.
Assuming you have a great page, the next challenge, then, becomes to work on the ‘top of the sales funnel’ — how do you get people to your page?
Imagine you are doing a crowdfunding campaign for Widgets Inc. You are creating a product, and for your manufacturing of Widgets to make sense, you need to raise at least $100,000 on a crowdfunding platform such as Kickstarter or Indiegogo. You’ve set the price of your widgets to $189.
How much money should you expect to spend in order to reach your $100,000 crowdfunding goal?
Now, the question becomes; How much money should you expect to spend in order to reach your $100,000 crowdfunding goal?
Let’s work the numbers and see how this works out…
Cost per click can vary wildly from category to category, so $1.50 is a guess. It could be a lot higher or a bit lower, depending on the industry you are in. Across industries, the average landing page conversion rate is 2.35% (source) — you can probably do better if your targeting is perfect. At a $1.50 cost per click and 2.3% conversion rate, your cost per conversion works out to around $65, which — will you look at that — brings the CAC/LTV ratio to roughly 1:3.
The really important thing to note, though: To reach your $100,000 goal, that means you’d need to budget around $35,000 of advertising spend to hit your crowdfunding goal.
Of course, you may have access to ‘cheaper’ customers. Maybe you have an existing mailing list. Perhaps you can ask influencers to help you. Maybe you can co-market your products, or you can convince a journalist or two to write about your campaign.
Whatever you do, don’t assume that your crowdfunding campaign will drive itself to success. That won’t work, any better than quietly listing a new product on your website and crossing your fingers that customers — most of whom will never have even heard of you — will somehow find your product and buy it.
The corollary of all of the above should be obvious, but I’ll say it anyway: If you cannot afford to spend significant resources on marketing your crowdfunding campaign, perhaps crowdfunding isn’t the right answer to the question you’re asking.
Haje is a pitch coach based in Silicon Valley, working with a founders all over the world to create the right starting point for productive conversations with investors — from a compelling narrative to a perfect pitch. You can find out more at Haje.me. You can also find Haje on Twitter and LinkedIn.