Tapping Retail Consumers to Fund Startups via Reward-Based Crowdfunding

A big challenge with crowdfunding is that only about 20 percent of projects successfully raise adequate funds.
Tapping Retail Consumers to Fund Startups via Reward-Based Crowdfunding

Crowdfunding is the practice of funding a project or startup by raising monetary contributions from many people online, without the help of standard financial intermediaries. 

According to Fundera, a massive 6.4 million crowdfunding projects were uploaded on online platforms in 2019. There are different types of crowdfunding, but a popular model used in globally renowned platforms like Kickstarter, Indiegogo, etc., is reward-based crowdfunding, where the backers receive non-monetary rewards from the beneficiary startups in lieu of their donation. 

The reward can include getting the crowdfunded product itself in the future. This encourages many ‘early adopter’ consumers to engage in reward-based crowdfunding. The global transaction value in reward-based crowdfunding was $940 million in 2020 (Statista, January 2021). It has not yet picked up in India, but with the recent startup boom, it has a huge potential to grow and catch up with crowdfunding leaders like US and China.

A big challenge with crowdfunding is that only about 20 percent of projects successfully raise adequate funds. On average, a typical successful project requires the support of 300 backers which clearly indicates how critical it is for startups to amass a large pool of funders to get successfully crowdfunded. This problem could be solved if startups can increase their crowd of backers by consciously tapping into the pool of potential retail consumers. But how can startups persuade ordinary potential consumers to support reward-based crowdfunding over retail purchases for owning new products? After all, making a retail purchase after the product gets launched, reviewed, and market-tested is a risk-free option for them compared to donating early on a crowdfunding platform and then waiting for a few months for the product to get developed before receiving an undertested version.

A recent research study revealed multiple factors that can entice ordinary retail consumers to take the risky reward-based crowdfunding route. The most important motivator was the combination of potential discounts offered on the future retail prices and the waiting time to receive the crowdfunded product as a reward. For instance, consider a startup that will launch a product currently under development in 5 months at a targeted retail price of Rs 10,000. It can offer its potential retail consumers to donate Rs 7,000 for crowdfunding today (30 percent discount on retail price) and receive the product after 5 months of waiting time. The higher the discount offered and the lower the waiting time, the more likely ordinary consumers to take the crowdfunding offer. Startups should be calculative in designing their crowdfunding offerings as high discounts become extremely critical in case of a high waiting time scenario without which the crowdfunding campaign would most definitely fail.

It was interestingly observed that potential consumers preferred to wait for a longer time to get a high discount in comparison to waiting less for a low discount. This can be considered counterintuitive in today’s age of ‘instant gratification’ where consumers feel impatient to wait for a few days for their products from online shopping to arrive. What was observed in the study is a thought-provoking example of ‘delayed gratification’ which refers to the idea of not preferring an immediately available reward in the hope of obtaining a more-valued reward in the future. Based on this finding, it can be recommended that startups should enter the crowdfunding market earlier rather than later in their product development cycle. They need not worry that potential backers would shy away from a high waiting time if a high discount is offered in return. 

Another motivating factor was the perceived attractiveness of the products. So, using appealing crowdfunding campaign videos beautifully showcasing the features of the product may work well. But highlighting the complexity or difficulty of the product development or making emotional appeals had a minimal persuading effect on the consumers. Females were more likely to refer friends for raising donations but were not significantly different from males in terms of the likelihood of donation. Also, the intention of getting into crowdfunding was found higher in younger consumers, especially those with higher risk-taking nature.

The potential of converting potential consumers into crowdfunding donors can lead to interesting win-win possibilities for online retailing platforms, especially in India, where there are no popular reward-based crowdfunding platforms. For example, Amazon or Flipkart can embed a crowdfunding page on their website for their users to browse and fund future products by startups. This could not only help thousands of startups reach their funding goals more easily by getting direct access to millions of e-tailing consumers, but also provide an avenue for consumers to browse and purchase interesting upcoming products in advance at good discounts. And of course, the e-tailing platforms can earn from their valuable service in bringing the two sides together as a marketplace.

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