4 Reasons to Crowdfund vs. Self-Fund a Product Idea
Position yourself for growth in 2017—join us live at the Entrepreneur 360™ Conference in Long Beach, Calif. on Nov. 16. Secure Your Seat »
Manufacturing a new product no longer requires risking your own capital or mortgaging the house. Crowdfunding is now a new way to test, validate and get feedback on your new idea. With platforms like Kickstarter and Indiegogo, you can quickly see if the idea is something the market wants before investing large amounts of time, capital, and energy.
The origins of crowdfunding are based on the patron business model, made popular by Beethoven and Mozart centuries ago. As musicians they made their living with a core group of patrons that sponsored productions, purchased concert tickets or booked private performances at their residence. Technology has enabled this model to make waves in the 21st century.The Internet has allowed patrons and project creators to be connected all over the world through crowdfunding platforms, me being one of them.
My first taste into the entrepreneurial world, I launched Baller Leather, a handmade Italian leather wallet retailer. I decided to go down the self-funding road and while fulfulling, I learned there were many bumps and unexpected turns in the road. So after seeing the success of others and learning about crowdfunding, I have decided that for my next venture -- the launch of a MacBook sleeve -- I will turn to crowdfunding. Having began the process, I think it is the right decision.
Having tried both paths of self-funding and crowdfunding for product ideas, here are a few reasons why you should consider crowdfunding:
1. Better way to acquire customers
With a new product idea, getting a ballpark range of your profit margins is fairly straightforward. You can check what the competition is selling online and compare it to similar goods listed on Alibaba that are available for manufacturing. The challenging part is finding customers that will actually buy it.
For Baller Leather I knew the profit margins going in as I purchased the initial batch of inventory. But figuring out a scalable way to generate traffic, awareness and sales was a challenge. Without a huge budget for paid advertisements, a lot of sweat equity was put in to grow the customer base.
Crowdfunding reverses this equation by letting you acquire customers first before any product is made. This gives the entire process much more visibility.
2. Better way to test price points
A crowdfunding campaign usually has multiple reward tiers. This allows you to test different price points and see which one has the best momentum with the market. If the campaign fails to reach its goal, it’s an important signal that your value proposition is misaligned.
Early on I made a mistake by pricing products based on a profit margin that I wanted to keep. It took a lot of trial and error to find a price point that consistently moved product out the door.
By running a crowdfunding campaign, not only will you be able to see how the market reacts, but you can also have a dialogue with backers to gather more feedback.
3. Better inventory management and forecasting
With no data on sales or demand, estimating how much inventory to manufacture is like throwing darts in the dark. It gets even more complicated with shipping, multiple suppliers or a product that requires assembly.
I was lucky to find a supplier that was flexible on minimum order quantities to keep my initial risk quite low. But for products that have minimums in the hundreds or thousands, it’s a huge gamble to put in an order before you have any customers. The ability to know exactly how much inventory you need is why crowdfunding is such a great tool. In addition, it also gives you credibility and leverage in negotiation with suppliers for volume discounts.
4. Better momentum and exit velocity
Attention is now harder to acquire, easier to lose and more challenging to leverage. People are easily distracted by their smartphones, blogs or the latest viral YouTube video. Unless you have an existing customer base or community to leverage, building a critical mass of attention that will translate into sales takes a long time to build.
A crowdfunding campaign gives people a reason to pay attention and support your efforts. As the campaign concludes, you will have significant relationships built up with bloggers, influencers and new customers. This asset can be leveraged for your next campaign, future products or an upcoming website that continues to sell your goods.