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What Goes Around Comes Around? Rewards as Strategic Assets in Crowdfunding

EXECUTIVE SUMMARY

 

Introduction

Reward-based crowdfunding is increasingly attracting the attention of the public. Individual success stories like the Pebble Smartwatch, which collected more than $20 million from 78,000 individual investors, have contributed to this interest. Reward-based crowdfunding platforms are based on an exchange of a monetary contribution for some kind of non-monetary reward. It’s quickly become a viable alternative to traditional funding. Studies have demonstrated that rewards play a vital role in driving crowdfunding behavior. Knowledge about the effectiveness of different rewards, however, is limited at best.

Motivational Triggers

In 2014, 3.3 million people pledged more than $500 million on the popular crowdfunding platform Kickstarter. This represents an increase in funding volume of 56% compared to 2012. As the amount of crowdfunded projects increases, competition intensifies as well. On platforms like Kickstarter, the most essential motivational trigger is the expected rewards or returns that supporters receive in exchange for their funding.

There are three major types of returns: social returns, financial returns, and material returns. Social returns, such as a sense of belonging or recognition, are generally most prevalent in donation-based crowdfunding. Financial returns are most commonly associated with equity-based or debt-based crowdfunding models, where backers consider their pledge as an investment opportunity. Finally, material returns may either resemble the pre-purchase of the core offering or come in the form of a symbolic equivalent. Material and social rewards are common on rewards-based platforms like Kickstarter. Projects that aim to finance more general causes often offer more symbolic rewards. Projects that seek funds for real products often follow the material rewards model. But what material rewards work best?

Strategy Formation

Reward type
is usually determined by the product type. The reward is either a symbolic token or a pre-purchase mechanism. Projects that pre-sell products (like technological gadgets) are more likely to offer pre-purchase rewards. Projects that are less tangible (like a theater production) usually lean towards more symbolic rewards, like t-shirts, mugs, or free downloads.

Tangibility
refers to whether rewards are material or immaterial. An actual product is tangible. A membership is intangible.

Scarcity
refers to whether rewards are limited in number. Exclusivity in terms of limitation is something that can be artificially generated and used strategically.

Geographical limitation
comes into play when projects target a local crowd. Entrepreneurs seeking financing for local shops or venues, for instance, might offer vouchers or tickets as rewards. These rewards are tied to locality and wouldn’t be relevant to those located in other parts of the world.

Monetary value
can range, in tiers, from $1 to $10,000. Funders can opt to spend more to be granted more exclusive rewards.

Recognition
refers to the symbolic reward of receiving public appreciation, usually through an acknowledgement.

Level of collaboration
is relevant to certain projects that provide the opportunities for supporters to become actively involved in the creation process. The level of involvement can range from simply offering backers customization options for certain products to offering backers a role in the project itself.

Core features
represent the major classes of reward: either the product or service itself, some kind of merchandise item, an experience, a bundle, or an offering exclusive to the crowdfunding campaign.

Rewards Toolbox

Most rewards feature a composite of several of the important dimensions. In rewards-based crowdfunding, the dominant rewards strategy among entrepreneurs (37.8%) is the pre-sell model-- the reward is a copy of the product itself. Other popular strategies (representing more than 20% each) are “top it up” -- which involves tiered bundles with bonus material -- and “collectible tokens” -- a symbolic reward that allows backers to show off their support of the project. Interestingly, the latter two strategies were more common among unsuccessful projects. A major framework for the different types of rewards strategies, and their effectiveness, can be found in the full article.

Implications

Managers of crowdfunding campaigns should consider the type of reward that works the best. Technology products always perform best under the pre-sell model. Plays and performances, by contrast, focus on the experience and offer more symbolic rewards. The fit between a project and its rewards is key.