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Understanding the Reward-Based Crowdfunding Model

For over 25 years, the crowdfunding model has been available to entrepreneurs, startups, creators, individuals, and others as a way to fund a project. This funding model can be a powerful way to get a project off the ground while building a buzz around a product or business. However, there are many types of crowdfunding models available.

In this article, we’ll take a look at one of the most common types of crowdfunding called the reward-based model. We’ll also give some examples of this model as well as discuss the benefits and drawbacks of it.

 

What is Reward-Based Crowdfunding

Reward-based crowdfunding is where individuals or startups raise money for their projects or business ventures by soliciting contributions from a large number of people. In return for their financial support, backers receive rewards. There are different types of rewards and they usually depend on the contribution level. This model primarily appeals to creators. This type of crowdfunding is often used in fields like technology, arts, music, film, and publishing, where tangible or experiential rewards can be offered.

While there are many types of crowdfunding models out there, the reward-based model is distinct from other crowdfunding types. For example, in equity-based crowdfunding, backers become investors receiving a stake in the company. The backers expect to make a profit from their investment in the campaign. That would be their “reward”, so to speak. In donation-based crowdfunding, contributions are purely philanthropic. Reward-based crowdfunding would give something back to their backer that is tangible but would not be monetary.

For entrepreneurs, reward-based crowdfunding is particularly attractive. This model allows entrepreneurs to validate their ideas in the market, engage with consumers, and simultaneously finance their projects without giving away equity or incurring debt.

Rewards in these campaigns are usually tiered. Small contributions might receive simple acknowledgments like thank-you notes or public mentions. Larger contributions could be rewarded with early access to products, personalized experiences, or exclusive content. The key is to offer backers a sense of participation in the project’s journey. Like with other crowdfunding models, the key is making backers feel like an integral part of the venture’s success.

 

Examples of Reward-Based Crowdfunding

The landscape of reward-based crowdfunding is dotted with numerous success stories. These stories show the potential of this approach. One iconic example is Pebble Smartwatch. They were able to raise over $10 million on Kickstarter. At the time, it was the most funded project in Kickstarter history. Backers were offered the watch at a lower price than it would retail for, and the campaign’s success highlighted the demand for smartwatches. 

Another notable example is the card game Exploding Kittens. This project attracted backers by offering them exclusive versions of the game. The unique thing was that the game wouldn’t be available after the crowdfunding campaign. The campaign was a massive hit. It raised over $8 million and became one of the most backed projects in Kickstarter’s history.

Film and video projects have also found success through reward-based crowdfunding. The “Veronica Mars” movie project raised $5.7 million. The campaign offered rewards such as scripts, DVDs, and even a chance to name a character in the movie. This not only funded the film but also created a pre-built audience, ensuring its success upon release.

These examples illustrate how reward-based crowdfunding can be a powerful tool for bringing innovative products and creative projects to life. As you can see, campaigns have a lot of potential. They also offer a unique way for creators to connect with their audience and build a community around their ventures.

 

Reward-Based Crowdfunding Platforms

When it comes to hosting a reward-based crowdfunding campaign, selecting the right platform is crucial. Each platform has its unique set of rules, audience, and fee structures.

  1. Kickstarter: Perhaps the most well-known reward-based crowdfunding platform, Kickstarter is synonymous with creative projects. It operates on an all-or-nothing funding model, meaning projects must meet their funding goals to receive any money. Kickstarter charges a 5% fee on successfully funded projects.
  2. Indiegogo: Offering more flexibility than Kickstarter, Indiegogo allows fundraisers to keep the funds they raise, even if they don’t meet their goals (for a higher fee). 
  3. GoFundMe: This platform is primarily associated with personal and charitable fundraising. However, GoFundMe also supports reward-based crowdfunding. It’s known for its user-friendly interface and flexible funding model. Unlike other platforms, GoFundMe does not charge a platform fee but relies on voluntary tips from donors.
  4. Patreon: Unique in its approach, Patreon is designed for creators who produce ongoing work, like YouTubers, podcasters, and artists. Instead of funding a single project, backers, or “patrons,” support creators with regular payments and receive exclusive content or experiences in return. 
  5. Crowdfunder: Focused more on startups and social enterprises, Crowdfunder offers rewards-based options along with equity crowdfunding. It’s ideal for businesses with a social angle and those looking to engage a community in their growth story.
  6. Ulule: This European-based platform stands out for its support of creative and innovative projects, especially those with a social or environmental impact. Ulule offers a unique global perspective, ideal for projects with an international focus.

Each platform comes with its unique advantages and community dynamics. This makes it essential for project creators to choose one that aligns best with their project type, target audience, and funding needs. By leveraging the right platform, entrepreneurs can significantly increase their chances of running a successful crowdfunding campaign.

 

Advantages of this Model

1. Early Market Validation

One of the most significant advantages of the reward-based crowdfunding model is the opportunity for early market validation. This model allows entrepreneurs and creators to gauge public interest in their product or idea before investing heavily in production and marketing.

By presenting the concept or prototype to potential backers, creators can determine whether there is a demand for their product. This feedback is invaluable. It can guide further development and adjustments to the product based on real consumer input. Successful crowdfunding campaigns not only validate the idea but also demonstrate a ready market. This makes it more attractive for entrepreneurs looking for future investments or partnerships.

2. Building a Community and Customer Base

Reward-based crowdfunding inherently creates a sense of community around a project or brand. Backers who contribute are not just passive consumers; they are early adopters and enthusiasts. They are usually more engaged because they provide feedback, share the project with their networks, and follow the development process closely.

This engagement builds a loyal customer base even before the product is officially launched.

Also, these backers often feel a sense of ownership or attachment to the project. This is a different type of ownership than equity-based crowdfunding where those backers actually get equity from their contributions. In the reward-based model, members of the community are long-term advocates for the brand. The community built through a crowdfunding campaign can be a vital asset for future marketing and sales strategies.

3. Reduced Financial Risk

Starting a new venture often involves significant financial risk. However, reward-based crowdfunding mitigates this risk by funding projects through small contributions from a large number of people.

This model enables entrepreneurs to raise funds without taking out loans or giving away equity, thereby reducing personal financial risk and avoiding debt. It’s particularly beneficial for small businesses and individual creators who might not have access to traditional funding sources.

Additionally, since the funding is based on the presentation of the idea or prototype, creators don’t have to invest heavily in developing a product before knowing its market potential, further reducing the financial burden.

4. Marketing and Publicity

Running a reward-based crowdfunding campaign can serve as a powerful marketing tool. It not only raises funds but also creates buzz and publicity for the project. A successful campaign can attract media attention. This can lead to wider exposure beyond the immediate network of backers. This publicity can be invaluable for brand building and can attract additional customers, investors, or business partners.

On top of that, the process of preparing and promoting a crowdfunding campaign forces creators to fine-tune their marketing message. They also need to better understand their audience better. This benefits their overall marketing strategy. Crowdfunding platforms themselves offer visibility in a crowded market. These platforms place projects in front of a diverse audience actively looking to support new ventures.

Disadvantages of this Model

1. Dependence on Strong Marketing and Social Reach

A significant challenge of reward-based crowdfunding is its heavy reliance on effective marketing. Those running the campaign also need a strong social reach. Success often hinges on the creator’s ability to generate buzz and attract backers through various channels. This includes social media, email marketing, and public relations. This can be a daunting task, especially for individuals or small teams without marketing expertise.

Additionally, those without an established social media presence or a large network may find it difficult to gain the visibility needed to reach their funding goals. This model favors projects that can capture the public imagination quickly. Good ideas that are less immediately compelling or harder to communicate are at a disadvantage.

2. All-or-Nothing Funding Pressure

Many reward-based crowdfunding platforms operate on an all-or-nothing funding model. This is where the project must reach its financial goal to receive any of the funds. This model can create significant pressure on project creators to set realistic yet sufficient funding goals.

If the goal is set too high, there’s a risk of not reaching it and getting nothing. Conversely, setting it too low may result in insufficient funds to complete the project. This pressure can be stressful for creators, especially those who are relying on this funding to bring their projects to fruition.

For those wanting to avoid this risk, Indiegogo may be a better option as it allows creators to keep the money they raised.

3. Production and Fulfillment Challenges

Reward-based crowdfunding requires creators to fulfill promises made to backers, often in the form of product rewards or experiences. Managing and delivering these rewards can be a complex and resource-intensive task, particularly for projects that receive overwhelming support and significantly exceed their funding goals.

Creators must deal with manufacturing, packaging, and shipping, which can be daunting for those without prior experience. There’s also the risk of underestimating costs and timelines for production and fulfillment, which can lead to delays, budget overruns, and dissatisfied backers.

4. Risk of Copycats and Idea Theft

Launching a project on a public crowdfunding platform exposes the idea to a vast audience, including potential competitors. This visibility increases the risk of idea theft or copycats, especially if the project concept is easily replicable. Creators might find themselves in a race to market against imitators who can capitalize on the original idea’s publicity without having to invest in the crowdfunding process.

This is a particular concern for products that rely on innovative yet easily duplicated designs or concepts. Protecting intellectual property in the open and competitive environment of crowdfunding can be challenging and is a risk that creators must consider.

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Thomas Martin
Tom is a member of the Editorial Team at StartUp Mindset. He has over 6 years of experience with writing on business, entrepreneurship, and other topics. He mainly focuses on online businesses, digital publishing, marketing and eCommerce startups.

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Tom is a member of the Editorial Team at StartUp Mindset. He has over 6 years of experience with writing on business, entrepreneurship, and other topics. He mainly focuses on online businesses, digital publishing, marketing and eCommerce startups.

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