Reducing financial risks in product-based crowdfunded campaigns: From campaign to e-Commerce

Zach Lukaszek, co-Founder of Ships-A-Lot

Zach Lukaszek is a former PhD student turned entrepreneur who enjoys writing about eCommerce, business, and programming.


bird@shipsalot.com

Zach Lukaszek, co-Founder of Ships-A-Lot

Zach Lukaszek is a former PhD student turned entrepreneur who enjoys writing about eCommerce, business, and programming.


bird@shipsalot.com

Reducing financial risks in product-based crowdfunded campaigns: From campaign to e-Commerce

crowdfunding, finance, fulfillment, shopify, web development -

Disclaimer: Many of these may sound like common business sense, but I remain constantly baffled by projects with incredibly sound marketing, engineering, and a disastrous lack of business sense.

 

Once you've hit your goal, your backing date is up, and the major marketing push is over: your crowdfunded project is now operating on a fairly fixed amount of revenue. You have $X to create and fulfill rewards to Y backers, hopefully retaining some of those earnings in the process; not only is your time worth money but those earnings could be used to seed additional developments!

That being said, unexpected costs are the worst thing a successfully-backed campaign can run in to during the post-backing phase of the campaign. These typically break down into a few different categories and can generally be dealt with aptly given the proper foresight. The categories are listed and explained below. 


Unplanned manufacturing costs

This topic further breaks down into problems with design and/or production.

Problem. Endlessly prototyping and testing.

This can easily result in projects going way over-budget, despite presumed gains in product quality; given this, the intangible costs of shipping delays and tangible setback of cash burn should be weighed against the higher product quality. Remember that almost any backer will be ecstatic with your 98% amazing prototype and disappointed by a 0% shipped but flawless end-design. While this type of design problem is not singular to crowdfunding, it is uniquely threatening to them.

Solution. Balance engineering gains against your backers' expectation of a return.

Problem. Production issues.

These will typically stem from a lack of communication between project creators and potential manufacturers and don't rear their ugly head until the deep-end of the post-backing phase. I've been witness to several projects that completely stalled after backing due to the creators being unfamiliar with volume requirements. One project went so far as to offer upwards of 20 different varieties (different SKUs, essentially) of rewards, some of which had sell-out counts as low as 5, without realizing that their manufacturer had minimum order volumes of 500 units per SKU! Basic estimates for the cost to manufacture (not receive, fulfill, or ship!) as described on the campaign page would have been around $120,000 against a backing of $30,000 and change! 

Solution. Detailed manufacturing estimates should happen before the campaign goes live, NOT AFTER. 


Leveraging your campaign into successful e-Commerce

Problem. Not doing it.

This is a transition that is fairly organic when it comes to crowdfunded merchandising businesses. Parse through KickStarter or Indiegogo and you'll see numerous companies with successful, existing e-Commerce presences launching new projects on these platform. This is no coincidence. Once a crowdfunding campaign has been backed, it then has all of the resources to segue immediately into e-Commerce, specifically online retail. Failure to capitalize on your momentum is a huge loss in future revenue; launching online retail while your marketing profile is at its peak enables you to capture customers who love your project but won't spend money on crowdfunding platforms.  

There is, in fact, a unique synergy between the online retail platform that I have yet to personally see utilized. Directly importing the back-end of your crowdfunded project into an online retail platform (I strongly recommend Shopify) gives you a number of advantages. Namely:

  • Backers are imported as live customers and can then be marketing to via newsletters.
  • Individuals who won't pledge to a campaign may purchase from your website, particularly if your marketing footprint is still strong.
  • Fulfillment costs will be reduced: fulfillment centers' order handling is designed around working with online retail platforms these days. Almost any fulfillment service will charge you significant additional fees to fulfill from your raw backer data; all they are really doing is importing it into an order handling system nearly identical to the ones on good online retail platforms. Even if you choose to fulfill on your own, this step will improve your accuracy & efficiency in shipping.

Solution. Just do it.

 Problem. Hiring a web developer when one really isn't needed.

This may be controversial. If you are launching a project via crowdfunding, it is likely that you are an entrepreneur. Your skills may have little-to-no overlap with actual web development. That's fine. You know that being an entrepreneur means flexibility and wearing many hats. This is a hat that I firmly recommend everyone try on. Modern e-Commerce platforms have made sensible, attractive, and functional design very simple to achieve. 

I recommend this so strongly due to mine and my partners' experience with web developers. Four out of the four firms we've contracted with had at least one of the following problems:

  • Could not deliver results on schedule
  • Could not deliver results on the budget we had agreed on

We even had a firm in Columbus, Ohio quote us at $125,000 for the basic structure of the site: a site that would be functional for about 3 months before needing additional work; work that only they could provide. 

We now host all of our websites, retail or not, on Shopify. While either of those issues are troubling for any enterprise, the second bullet point is truly devastating for a crowdfunded project. You may potentially end up in a situation where you can't afford to pay for the completion of your site, ending up with a big cash spend and no website.

Solution. Wear that hat! Design it yourself!

Problem. Not doing the above with Shopify.

Okay. I get it, this is absolutely shameless. No, I'm not getting paid for this; I'm not tmartn. The Shopify platform is now superior in both basic and extended functionality. Even a year ago, this opinion would be much more dubious. Now, I find it very simple to argue this point. Below are some of the key features that shine.

  • The Shopify app community is now a highly diverse ecosystem, with features and price ranges to fit nearly any need. I'd still love to see more business intelligence oriented apps, there is still great functionality available right now.
  • Shopify payments is a widely-recognized and highly secure (especially with one-time CC transactions) payment gateway that has competitive transaction fee percentages.
  • Shopify now manages reviews for free, a service that used to cost thousands per quarter for quality work.
  • Smooth Shopify integration is now a priority for all developers of fulfillment software.
  • Shopify's implementation of Liquid is pretty solid. It's still missing some flavor of wildcard matching, so some loops and conditionals can get a little convoluted. Regardless, it has become highly evolved and the HTML editor native to Shopify has a really excellent interface.
  • Newsletters and scripted emails are both native to Shopify and are intuitive to use as well as easy to organize marketing attribution for.
  • The discount system is incredibly simple and allows for straightforward sales attribution.
  • In three years of operating Shopify stores, we have yet to experience downtime that produced any business interruption whatsoever. We have even been DDoS'd a handful of times with no problems.

Solution. Use Shopify.


 

Fulfillment

Fulfillment is a make-or-break stage for any merchandising enterprise. Execution, expedience, and efficiency will all: color the quality of your reviews, generate lost revenue through mass returns, and potentially sink the entire business. 

So, yes, this one can be pretty serious. 

Problem. Fulfillment invoice is more than you can pay.

If you glance at FBA's pricing guide, you'll notice they've done a pretty solid job of outlining their fee schedule (AKA ad-hoc fees). While this may be kind of them, FBA remains fundamentally fee schedule based. They are not an exception to the rule, nearly all fulfillment centers use fee schedules (we don't!) and this very bad for a crowdfunded campaign. 

When working with such a model, you will be unable to predict what your monthly invoice will add up to. If you are unable to pay, fulfillment will cease; creating a pretty negative experience for backers! While Amazon is a great example of honesty, other fulfillment centers may attempt to hide their profit in extensively marked up shipping labels. They may also purchase overpriced labels and fulfill with cheaper ones. I have witnessed both.

Solution. Thoroughly interview and vet any potential fulfillment partner.

 


- Zach Lukaszek

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