Why your retail price needs to be higher than your Kickstarter price

What pricing model should you use when going from crowdfunding to retail?

As an indie creator, I’ve come to understand and appreciate the impact of crowdfunding, but that’s not true of everyone.

Many comic creators have their eyes firmly fixed on the direct market, which for those who are not in the know, is the mechanism by which distributors advertise upcoming comics to retailers, who then place orders as to what they think their customer base will buy. Often these retailer orders occurred months in advance of the comic release date, retailers were not compensated if books arrived late, and were unable to return any unsold stock.

Yes. It sounds incredible, but this was actually the way comics worked for some time, until Diamond (the monopoly distributor) somehow contrived to put themselves out of business. But that’s another story.

Indie creators can (if they are persistent) also get their work distributed to retailers, but typically in much smaller volume. It’s still immensely gratifying to see your book on the shelf of your local comic shop, but the cost is high, and you are unlikely to ever see a dime from sales of your book.

But you do get paid in exposure!

It’s a similar story for indie authors, who can try to get their books into stores through Ingram (or other distributor), and/or push their books out through Amazon KDP or other print-on-demand services. But the book market is so huge, that unless authors have a marketing plan and budget, the net result is typically low sales numbers, which don’t yield much (if any) revenue.

Crowdfunding is a different matter.

For both comics and books, you are essentially pre-selling your work direct to an audience. This is different to pre-sale ordering, in that the comic or book may not even fully exist at the time of the crowdfunding campaign (although it really should be close to help instill confidence in backers).

While the number of backers for a given campaign may be small (relative to the sales in retailers), the key difference is that funds go directly to the creators. Sure, they have to pay for printing and shipping costs, but it is possible for indie creators to actually make some money on their work through this method.

Even better, in many cases, creators can run a crowdfunding campaign and still try to get their book into retail stores (either directly or through another publisher).

So why don’t more indie creators go this route?

It’s taken a while for many people to come around to the idea. Even now, I regularly encounter creators and authors who see crowdfunding as “begging for money,” which of course – they are above.

The scientific term for this is bullshit.

The irony here is that the same creators and authors seem fine to drop large amounts of cash on marketing campaigns (mostly on Facebook and Amazon) to promote their work, yet I wager they are not really seeing a good return on their investment. If they were open to new ways of doing things, they would realize that a crowdfunding launch is basically a giant time-limited marketing campaign; one that could actually make them money before they even test the murky waters of the retail environment.

My past two books used this approach, launching first on Kickstarter before going wide through indie distribution channels at a later date. My upcoming horror book will also follow this plan, and I’ll have more information about that in future posts.

In this approach, I’m using crowdfunding as the start of a marketing campaign for my work. Sure, it’s extra work that I have to do, but the rewards far outweigh the effort, and that’s why I think it’s an incredible tool for indie creators to use.

But, I do worry about my audience. I worry that launches may have a negative impact on potential downstream sales.

After a quick scan of the research literature, I did find an interesting pre-print that touches on this topic (not exactly, but it’s close)1. Unlike a lot of the papers I’ve explored, which rely on regression analysis, this one uses economic modelling which comes with it’s own strange lexicon including “utility cost” and “exiting markets.”

The question probed by the researchers is whether it is better to launch a crowdfunding campaign, or a campaign followed by direct sales?

To do this, they consider two different models: model 1 is where there is only a crowdfunding campaign, and model 2 is where there is a campaign followed by a retail launch. Only the latter is of interest to this discussion.

Specifically, they are interested in the following questions:

1. How can the creator determine the optimal product price and funding strategy when employing either pre-announced pricing or responsive pricing?
2. What is the optimal pricing strategy for the creator in the low or high funding goal policy?
3. How do social learning and consumer’s strategic behaviour affect their decision-making

Pre-announced pricing refers to the creator announcing the complete price path for both crowdfunding price and retail price at the start of the crowdfunding campaign, while responsive pricing refers to the creator only announcing the crowdfunding price, leaving the retail price to a later date.

You may ask why someone would use pre-announced pricing? Usually it’s because the retail price will be higher than the crowdfunding price, and the creator is signalling that it’s more important to back that (rather than waiting for retail). For reference, the reactive pricing strategy is the one I use (although I didn’t refer to it this way).

The low/high funding goal (LFG/HFG) refers to the target goal of the crowdfunding campaign. Ones with a LFG are more likely to be funded, but may not generate much revenue for creators, whereas HFG campaigns may generate significant revenue but are riskier.

So far, so good. But it’s worth mentioning some caveats at this point. This model is a thought-experiment where backers are only confronted with a single crowdfunding campaign. They are asked to assess the value of that campaign and the retail phase in isolation, which is not how it works in the real world, where your comic or book or gadget is one of hundreds of similar products.

This model is further populated by backers, of which there are only two types: strategic, and myopic.

• The former are assumed to evaluate the trade-off between the expected utility of backing a campaign versus supporting it once it is in the retail market.
• The latter are those who will back the campaign regardless of social learning, and typically include family, friends, and highly motivated backers who will back the crowdfunding campaign but not the retail one (provided that they see positive utility).

The analysis is interesting, but I’ll synthesize the main points.

Pre-announced pricing with LFG

Model 1: The lower price will encourage most backers to support the campaign. The creator can also raise more money in this model than in model 2, because they can lower the price to increase the number of backers.

Model 2: Creators can charge higher crowdfunding prices, and adjust the retail price to pick up the strategic customers who choose to wait. In terms of pricing, the correlation between crowdfunding and retail pricing hinges on the social learning outcome.

• If this is low, then strategic backers will support the crowdfunding campaign and the crowdfunding price can be pushed higher, while the retail price can be lower. This is referred to as a decreasing price-path.
• However, when social learning outcome is high, an increasing price-path is more profitable (i.e., the retail price is higher than the crowdfunding price).

So, what is the social learning outcome?

The paper defines this as the change in evaluation of the product quality based on exchanged product information. Crowdfunding is essentially a signalling model, where creators use fixed forms (e.g., video, images, text) to try to convince backers to support the campaign. The backer also has other information to help them identify quality, such as creator experience and network effects. Products that were previously crowdfunded and are then sold in the retail setting are assumed to have higher perceived quality because i) the products actually exist and ii) were backed by other people, so have already been tested in a market.

Now, the model suggests creators might not raise as much money in the crowdfunding campaign, but they have the long-tail of the retail distribution, so can make more overall profit than in model 1.

Responsive pricing with LFG

When the crowdfunding project is successful, the only motivation for strategic backers to delay backing is a lower retail price. So, to maximize profit, creators should decrease the crowdfunding price and raise the retail price (i.e., an increasing price path).

Pre-announced pricing with HFG

Model 1: Creators can again charge a lower crowdfunding price than in model 2, which encouragers more backers.

Model 2, the correlation between crowdfunding and retail price depends on the crowdfunding success rate.

• When this rate is low, strategic consumers are more likely to back the crowdfunding campaign, so creators should increase the crowdfunding price and lower the retail price (decreasing price-path) to optimize profits.
• When the success rate is high, an increasing price-path is most profitable.

Responsive pricing with HFG

In this case, the crowdfunding project has a level of uncertainty attached to its success (since the goal is higher). Strategic backers will not only consider waiting for the retail price, but will evaluate the likely success of the crowdfunding campaign. When the success likelihood is low, a decreasing price path is more profitable, but in all other cases, an increasing price-path is optimal.

What does this mean for creators?

There are many ways to slice the data, but the first one to consider is the crowdfunding dimension:

• For a low funding goal, the pre-announced pricing strategy is dominant because the only motivation for strategic consumers is to delay purchase until the retail period when there is a decreasing price-path.
• For a high funding goal the pre-announced pricing is only superior to the responsive pricing if the success rate is low. When the success rate is high, responsive pricing becomes more optimal.

And for those of you who are more interested in the pricing strategy:

• For pre-announced pricing strategies, a low funding goal is optimal when the success rate is low, and an increasing price-path is more profitable.
• For responsive-pricing strategies, a high funding goal is preferred only if the success rate and altruistic motivation are high, and an increasing price-path is the more profitable model.

This tells us a few interesting things. First that the crowdfunding campaign also impacts the overall pricing strategy, as there are some scenarios that generate more total revenue and others that generate more profit. Second, that the most profitable approach (whether pre-announcing or responsive) is to use an increasing price-path e.g., the unit price in retail should be higher than the price you charged in the preceeding Kickstarter.

Most creators want to create high-quality campaign pages to help create trust with their potential backers, thus the social learning outcome is likely to be high. For low funding goals, this confirms that you should charge a higher retail price as above. For high funding goals, there is interesting dependence on the success ratio – which in itself is likely a function of the social learning variable; since campaigns which appear trustworthy and provide more information are more likely to attract backers (thus pushing the success ratio towards 1).

The optimal strategy identified in the paper is to set a higher retail price than crowdfunding price.

The takeaway is that this paper speaks to the importance of crowdfunding as a revenue generation tool for creators, which intuitively and empirically makes sense to me. Indie creators who only choose to sell retail are simply leaving money on the table.

Of course, the already noted caveat is that this model only assumes a monopoly position. In reality, backer-perceived quality is evaluated against other (very) similar products, which will have a big impact on the analysis. Hopefully a more detailed analysis will provide more answers in future.