Kickstarter is one of the leading brand names in the world of crowdfunding. They’ve helped to make crowdfunding a $5 billion per year industry that is still growing. Estimates put the value of all crowdfunding as high as $27 trillion per year. How does the site gain revenues and make money? The Kickstarter business model is a basic commission-based system.
Kickstarter provides a platform for people to raise money. If a campaign achieves its goal, then Kickstarter earns a 5% fee on the amount that has been collected. For every $10,000 that is raised, Kickstarter gets a $500 cuts. That might not seem like much, but for the Coolest Cooler that raised over $13 million, Kickstarter’s cut was about $650,000 just for hosting the campaign and sometimes promoting it on their home page.
Why Is the Kickstarter Business Model Sustainable?
Kickstarter is able to defend their business model thanks to their focus on creative projects. They’ve added some flexibility in recent months with campaigns that can be instantly started [take the potato salad campaign, for example], but they have consciously chosen to limit their market growth opportunities by focusing on one generalized niche. In return, they are able to easily defend their market share of crowdfunding when it comes to creative projects.
Part of the reason behind this success can be attributed to what has been called the Ikea Effect. When people shop at Ikea for furniture, they’re not taking home something that looks like it does on the sales floor. They have to put together the furniture at home, hoping that all of the parts have been included in the packaging. Because there is a struggle to put together the furniture and make it beautiful, Ikea’s customers appreciate their purchase more than if they bought something that was preassembled. They’ll even take care of it better.
This is at the core of how Kickstarter operates. Customers are made to become invested into each project they support because the rewards won’t come their way if a target goal isn’t reached. Supporters are almost forced to market the campaigns they’ve supported if they want the rewards to appear. It also means people are generally tempted to spend more on a Kickstarter campaign to ensure its success.
Kickstarter Shifts Where the Risks Are Placed
In most businesses, it is the business itself that assumes the risks of doing business. They secure the inventory or provide the service for the customer and are forced to do a good job or risk refunding the money provided by the customer. The Kickstarter business model moves the risk from the business to the supporter instead.
This makes it easier for Kickstarter to support more campaigns. Because the only real risk to a business or an entrepreneur is the time involved in creating and marketing a campaign, it is sweat equity instead of cash equity that gets put into Kickstarter. For the supporters, they are actually putting their cash down to risk and investment. Even during a successful campaign, there is a risk that they won’t receive their promised reward.
The benefit to the business model is clear: as more supporters get involved, the network of support for Kickstarter grows. A larger network of supporters means that more campaigns are likely to receive the funding that has been requested. That means Kickstarter has a better chance to receive their 5% commission from a met goal.
Viral Mechanisms Are Automatically Built Into the System
The Kickstarter business model has ingeniously built in an automatic system to make campaigns become viral. Social sharing is just one component of this mechanism. If someone finds something that is “neat” or “cool,” they don’t have to financially support the campaign themselves to contribute to its overall funding. Just a simple share on Facebook or Twitter can create more awareness and potentially more cash.
That’s because every supporter is bringing in their entire network to the campaigns that they support. This makes the Kickstarter model different than other online models like Amazon or eBay because the largest supporters within that network are automatically leveraged into the crowdfunding site. It isn’t quite retail, but it isn’t quite investing either. That’s what makes the business model so intriguing.
There Are Traces of the Subscription Business Model in Play
Crowdfunding is also unique in the fact that supporters are not just purchasing future items that have value to them in a way to make money for campaign creators. They’re also subscribing to the campaign itself. There are consistent updates for comics, music, films, and other projects that let people stay informed about what they’ve supported.
It is similar to how artists used to operate their businesses in the past. By going directly to the audience who wants the products that are being offered, it becomes possible to raise sometimes ridiculous amounts of money for work that is rendered.
The difference here is that in the subscription business model, there is a guarantee that products are going to be received. There is no guarantee on an investment made on Kickstarter. It isn’t an e-commerce platform. It’s a speculation platform. Since Kickstarter claims no ownership over the campaigns that are run, however, there is still advantages to the creators and the supporters that connect on Kickstarter to fund great ideas.
Kickstarter Also Manages the Site to Stop Fraud
One of the primary concerns about the Kickstarter business model is that there is the possibility that it could be manipulated to raise money for fraudulent projects. Although a majority of the projects are viable ideas, there have been some notable cancellations and this reinforces the protective nature that supporters feel toward the site.
The most notable failure was the iFind project. It claimed to be a battery-free locating tag that could be used to find virtually anything. Without a working prototype and questions about the technical viability of the technology being discussed, Kickstarter decided to cancel the campaign. More than $500,000 had been raised.
On the other end of the spectrum is Pebble. For a long time, the Pebble E-Paper Watch was the top-funded campaign on Kickstarter, topping $10 million. It took 2 years for the Coolest Cooler to eclispe that figure with a $13 million campaign. In March 2015, Pebble came back with their “Awesome Smartwatch – No Compromises” campaign that generated $20.3 million to reclaim the top spot.
Kickstarter also benefits from being early supporters of successful start-up ventures like Oculus Rift, which was eventually sold for $2 billion.
The Kickstarter business model might not be for every business, but the simplicity of combining commissions and subscriptions to create crowdfunding is pure brilliance. The lesson learned here is also simple: put the needs of others before your own needs and the seeds of success will be planted.