Prior to launching your rewards based crowdfunding campaign, you will need to establish different reward levels for your backers. Typically reward levels range from $5 for a simple “Thank You” email, or other modest token of appreciation, all the way up to multiples of a pre-sale product. While you don’t need to be concerned with the cost of a “Thank You” email, you certainly need to understand the production costs associated with any pre-sale products. For instance, if you are going to offer a pre-sale product at a $50 reward level, then you should make sure it isn’t going to cost you $150 to make.
To get a better understanding of what can go wrong with a crowdfunding campaign, when production costs are misunderstood in relation to reward levels, just take a look at what happened to Coolest Cooler. The Coolest cooler was one of the biggest crowdfunding campaigns ever run on Kickstarter and raised over $13 million from nearly 63 thousand bakers. This campaign offered 11 different reward levels, but the one that seems to have gotten the company into the most trouble was for “your very own COOLEST, complete with blender, a waterproof Bluetooth speaker, USB Charger and all the other awesome features” at $185, or $115 off the retail price of $299.
Over 50 thousand backers took advantage of this reward level for a pre-sale product and many of them never received anything. So what happened? According to an email sent out by the company’s CEO Ryan Grepper and various stories published in the news, the company ran out of money because it was costing much more than $185 to produce and deliver the Coolest cooler. Simultaneously while still trying to figure out how to get coolers to the backers of the campaign for $185, Coolest coolers are being sold on Amazon for $499 – or for $200 more than the retail price they originally anticipated.
Coolest Cooler raised over $9.3 million from the 50 thousand backers that pledged $185 or more for a pre-sale cooler. However, based on the retail price being charged on Amazon, they probably needed nearly twice that amount, or $18 million, to satisfy all of those backers. The company is now planning to run an equity based crowdfunding campaign on Circle Up to raise the additional funds to deliver the coolers.
If you want to avoid the problems that are plaguing Coolest Cooler, make sure you have a good understanding of how much it will cost to produce your pre-sale products before setting reward levels. While you don’t want to set a price that is too much, so that your backers will feel cheated, you need to set a price that is realistic so you don’t go broke. Ideally you will have developed a prototype, worked out the details of production orders with your suppliers, and gotten accurate estimates for packaging and shipping costs. Lastly, give yourself an insurance policy and limit the amount of pre-sale product you are going to make available at any given reward level – especially if there is any doubt in your mind as to what your final production costs are going to be.