The number one question we hear from creators planning crowdfunding campaigns is: What should I set as my funding goal?
In this post, we:
- Outline the mechanics of crowdfunding
- Show you how to scope your project to set a good funding goal
- Explain why you shouldn't be afraid of failing to reach your funding goal
How crowdfunding works
Crowdfunding: It's just like herding cats. (Photo: Alain Pham)
The basics of all-or-nothing funding models
When you create your crowdfunding campaign, you will set a goal of a certain amount of money you intend to raise (your “funding goal”). While your campaign is live, backers pledge money to support your project. At the end of the campaign, if the total pledges exceed your funding goal, your campaign is “funded”. The pledged funds are yours, and it’s now time to bring your project to life!
If you don’t reach your funding goal, you don't collect any of the funds, no matter how many backers pledged their support to you. The backers' credit cards won't get charged, and you won't be obligated to deliver any backer rewards. You'll walk away rich in lessons learned, with useful information that you can apply to your project if you decide to try again, but you won't collect any money.
Most crowdfunding platforms, like Kickstarter, are all-or-nothing: you either raise enough funds to meet your goal, or you walk away empty-handed. This setup may seem like a harsh deal, but crowdfunding campaigns are structured this way to ensure you have the funds you need to complete your project.
Note: There are some exceptions to this all-or-nothing model, such as Indiegogo’s Flexible Funding campaigns.
Most campaigns require a minimum amount of money
Crowdfunding campaigns are all-or-nothing because most projects require a minimum amount of resources to get off the ground. For example:
- If you’re printing a book or manufacturing a board game, most printers will have a minimum production run to cover setup costs.
- If you’re making a video game, you may need to hire a design and development team.
- If you’re creating an art installation, you may need to rent space to display your creations.
- If you’re building a smartwatch (hi!), you’ll probably have to cover upfront expenses (often referred to as non-recoverable engineering costs or NRE) before any manufacturing starts.
Whatever your project, you need to know the minimum amount of money required to make it a reality. Good crowdfunding campaigns are structured to make sure that when you reach your funding goal, you’ll have the resources you need to follow through.
Make sure you collect enough eggs to make your cake AND your frosting. (Photo: Katherine Chase)
Can’t I just set a $1 funding goal and then take whatever I get?
If you think some money is better than no money, stop for a moment and ask yourself what your goal is. For some projects, a good outcome might be having enough cash to support uninterrupted work on your project for the next few months. In this case, setting a low goal could be the right target.
Similarly, if you’re building the product or artwork yourself, you might have all you need except for the raw materials. Even books can now be printed on-demand, so a run of one can make sense.
As long as you have all you need to produce and deliver your project, setting a low funding goal can be fine. Just make sure you correctly calculate everything you’ll need to deliver (including shipping).
However, if you’re turning to crowdfunding, your goal is likely ambitious. Whether you’re producing a film, building a gadget, or creating a new kind of board game, you’re going to need capital in order to execute.
In this case, make sure you’ve done your homework. Find out what your project is really going to cost, including fees and shipping, and then add a 20% contingency buffer on top of that.
The reality is that crowdfunded projects are brought to life by the blood, sweat, and tears of their dedicated creators. It’s a hard, uphill, and thankless battle, and backers can quickly turn critical when projects start to delay. To succeed, you'll need to put together a plan based on your best guess at what resources you need to achieve your goal.
The cost to deliver
The exact costs to deliver you project will to be unique to whatever you’re working on, but here are a few key points to consider.
The nuts and bolts: fixed costs, variable costs, and shipping
Start with a blank page—or better yet, a blank spreadsheet. (Photo: Kelly Sikkema)
Fixed costs are anything you'll need to spend money on regardless of the size of your campaign.
This could be rent for performance space, tooling for your product, salary for a designer, or rental costs for your production equipment.
The first thing you should do is open up an Excel or Google Sheet, list out these fixed costs, and assign a price to each. If you don’t know what everything costs, find out or do you best to guess. Sometimes it can help to write down both a high and low cost estimate so you have a sense of what overshooting or undershooting your estimations will mean to your bottom line.
The sum of these fixed costs gives you your initial baseline for your funding goal (but don’t stop here!!).
If you’re promising any rewards to your backers, even if it’s just a t-shirt, you’ll also want to list out any variable costs. Variable costs are any costs that increase with the number of backers or size of your campaign. These will include the cost of raw materials for your rewards, along with any labor costs that are incurred on a per-customer basis.
To account for variable costs in your funding goal, you’ll need to determine the minimum number of backers your project will serve. If, say, the printer for your book specifies a minimum production run, use that number to determine the baseline variable costs for your funding goal. If you don't have a figure like a minimum production run handy, the fixed costs you mapped out above should give you some idea of how many backers you need in order for your campaign to succeed. How many people would need to back your campaign in order to cover your fixed costs? Get a ballpark estimate or try out high and low estimates to determine a reasonable expectation for your baseline variable costs.
If you're offering multiple rewards, expect to model out variable costs by backer tier. Fire up that spreadsheet and experiment with possible scenarios.
Once you've modeled out your variable costs, add the resulting dollar amount into your funding goal.
Shipping costs will not count towards your total amount raised, since most campaigns opt to have backers pay for shipping on top of the price of their rewards. However, shipping can still impact your bottom line and even inhibit your ability to deliver on your campaign, so plan ahead.
The Coolest Cooler, which raised over $13 million on Kickstarter, serves here as a cautionary tale. Once the coolers were built, the creators found they did not have the funds to ship them. They were forced to start selling the coolers on Amazon in order to produce enough revenue to cover shipping costs for their original backers.
If you're planning to ship backer rewards yourself, look up postal service rates for the size and weight of your items to determine a shipping rate that makes sense. In setting your rates, make sure you distinguish between countries—have different rates for the US and the rest of the world, for example (or rates for US, Canada, and rest of world, if you're Canada-grown like Pebble). You won't know exactly where you're shipping until your campaign is over, so make sure the difference in rates accommodates the difference in postage. If, say, shipping your item to China costs $10 more than shipping it to the US, make sure that every backer from China will actually pay $10 more for shipping.
In addition to postage costs, make sure your shipping costs cover the cost of packaging. Some items may also require additional duties and taxes, so make sure to include these in the shipping cost as well. In all cases, add a buffer to whatever you think your shipping rate will be to cover contingencies.
If you're planning to ship over one hundred items, you should talk to a fulfillment facility. These facilities will pack and ship your product and usually offer a lower rate than you would get on your own. Kickstarter provides a useful list of fulfillment resources, many of which provide tools that can help you estimate shipping cost ahead of time.
* If you're manufacturing your product overseas, or even out of state, you'll also want to make sure you account for the cost of shipping between your factory and your distribution center. Freight forwarders can help you determine this cost.
Extra costs: refunds, fees, and contingencies
Make sure you're prepared for anything. Yes, anything. (Photo: Dmitry Ratushny)
Most crowdfunding platforms will not require you to give refunds. However, refunds are a good idea for two reasons. First, refunds allow you to foster a positive relationship with your customer, which is important if you intend to build a business on the back of a successful crowdfunding campaign. Second, refunds signal legitimacy: if you offer refunds, you're signaling that you expect your backers to be satisfied and will take extra steps to ensure they're happy with their reward. This dynamic makes backers more likely to trust that you can deliver, and therefore more likely to support your campaign.
At Pebble, refunds made up around 8-10% of our total sales, so add a 10% buffer to your funding goal baseline if you plan to offer refunds.
Most crowdfunding platforms charge a percentage-wise fee if your project is funded. For both Kickstarter and Indiegogo, this fee is 5% of the total funds raised.
Meanwhile, payment processing fees usually run between 3-5% (the actual breakdown is 3% + $0.20 for pledges over $10 and 5% + $0.20 for pledges under $10).
Make sure to add on additional buffers to your funding goal baseline in order cover these costs.
Because of how most crowdfunding campaigns are structured, backers are not charged for their pledges until after the campaign finishes successfully. When the crowdfunding platform then attempts to charge these backers, a small percentage of the charges won’t go through. As a result, the actual amount of funds received will be slightly less than what you raised.
Expect this percentage of uncapturable funds to be around 2-3%.
The contingency buffer
Finally, if we’ve learned one thing from running the Pebble campaigns and advising dozens of other crowdfunding creators, it’s that you should always expect the unexpected. There are plenty of things that can go wrong for any project: the space you booked for your art installation might kick you out at the last minute, your manufacturer might back out of your contract, or the designer you hired might be unable to meet your deadline.
These unforeseen circumstances can lead to major delays, which will test your backers’ trust in you and result in an explosion of angry Internet comments. You want to have enough money in the bank so that your financing for the project is not balanced on a razor’s edge.
We recommend a 20% boost to your baseline figure to ensure you can handle any contingencies that arise. For high-risk projects like tech gadgets, this buffer could be even more—adding a 50% contingency is not unreasonable.
Example: The cost to deliver a graphic novel
Let's say you're creating a graphic novel. You're planning to send each of your backers a copy of the book, along with a custom lapel pin as a special gift. You've spoken to your printer about doing a minimum production run of 100. You're handling most of the creative work yourself, but you've convinced a designer friend to help you finalize the layout for a small fee. What should you set as your funding goal?
Costs Running total
Printer fee for run of 100 books (8x10in, 80 pages, color-printed) = $1,285 ................................................ $1,285
Layout designer = $450 ............................................................................................................................................. $1,735
Lapel pins = $1.20 / pin * 100 minimum backers = $120 .................................................................................. $1,855
Expected postage cost for US = ~$3.20 via media mail
Expected postage cost for rest of world = ~$13 - $30 depending on country
Packaging = $59 = $0.59 per backer, based on:
Final RoW shipping rate = $20.59 + a little buffer = $25.00
10% refunds = $1,855 * 0.1 = $186 ......................................................................................................................... $2,041
5% Kickstarter fee = $2,041 * 0.05 = $102 ............................................................................................................ $2,143
3% + $0.20 payment processing fees = $2,143 * 0.03 + $0.20 * 100 = $85 .................................................. $2,228
3% uncapturable funds = $2,228 * 0.03 = $67 .................................................................................................... $2,295
20% contingency = $2,295 * 0.2 = $459 ............................................................................................................... $2,754
Suggested funding goal: $2,754
Can I raise more than I need?
Let’s say you’ve calculated the minimum amount of money you need to raise to bring your project to life, based on our guidelines above. Should your funding goal be any higher than that?
It’s great to be ambitious—and if you know you have the audience to deliver on a million dollar campaign, go for it! But in most cases, there’s no harm in setting a low funding goal so long as it's enough for you to deliver on your project. In fact, we recommend it for two key reasons:
1. There is no upper bound in crowdfunding.
There is nothing stopping you from raising as much money as backers are willing to give you. As long as you raise enough to fulfill the project, you’ll have what you need to move forward. And since you can’t change your funding goal after you launch your campaign, why not give yourself some wiggle room? No one is going to question you setting a well-planned goal—no matter how far you end up exceeding it!
2. Backers need to believe your funding goal is achievable.
When you launch a campaign, your first backers will be your most fervent supporters, and this is a great start. But as you move to a wider pool of prospective backers, backers will need to believe the project is going to happen before they pledge their support. The pattern we've seen is that people want to be part of something successful. The sooner your funding goal is in sight, the more willing these backers will be to jump on board and support your campaign.
Focus on setting the right goal for the project: ambitious enough that you’ll have what you need to follow through, but low enough that your crowd will have no excuses not to back you.
But what if I fail?
A leap of faith. (Photo: Jordan Opel)
Once you’ve scoped out all the costs and determined a reasonable funding goal, the final number might feel unachievably high. Perhaps you’ll feel the urge to lower the goal a bit, just to make sure you actually hit it. But you shouldn’t lower your goal if the new number won’t enable you to deliver on your promises to your backers.
Failure to reach your funding goal is not the worst outcome for a crowdfunding campaign. The worst outcome is that your campaign succeeds, but does not raise enough money to deliver because you set your funding goal too low.
You may worry that choosing a meaningfully high funding goal may increase your odds of failure. But a failed crowdfunding campaign still beats a “successful” campaign that you can’t realistically deliver on. In crowdfunding, failure should not be your biggest fear. Even if you fail, getting your product out in front of a real-world audience will give you invaluable feedback about how you can improve both the product and your messaging in the future.
Crowdfunding campaigns can be big projects. The best way to set yourself up for success is to plan ahead, do your homework, and know what resources you're going to need in order to deliver on your project. The more work you put ahead of time, the easier it will be to follow through when your campaign succeeds.
What topics would you like to see us cover next? Drop us a note with your best crowdfunding questions and we'll dive in soon!