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How Crowdfunding Helps Reduce Risk
© Image: Flickr.com / kyz
editorial

How Crowdfunding Helps Reduce Risk

When creating a new product, one of the most difficult things to gauge is market interest. You and a few of your friends may think you have a fantastic product, but how can you be sure that potential customers will think so, too?

In the past, the way to test the market was to create the product and see how people responded to it. This meant committing upfront costs to manufacturing a small batch of the product – denying you economies of scale – and either going back to make more (if it did well), or losing the investment (if it did not).

Crowdfunding, however, helps reduce uncertainty around market interest in a product. To show what we mean, we highlight two platforms that make use of this advantage.

The first is Teespring, which crowdfunds custom-designed apparel. Sellers can upload designs or select from over 10,000 stock pictures to customize shirts, hoodies, or tank tops. Sellers then choose the number of shirts they want buyers to pre-order before they are actually printed (the higher the goal, the cheaper each one is), and the mark-up. Included in the base cost is Teespring’s cut.

Since the shirts don’t get made until the designated number of people commit to buying them, there is no risk involved with submitting a design. There are no unlimited campaigns on the site, so (as Kickstarter creators might put it) Teespring isn’t a store – at most, a seller can keep an item up for three weeks. If you’re a budding fashion designer looking to test an idea or a nonprofit looking to fundraise in a novel way, however, the platform acts as a good way to gauge the market.

The same concept applies to Picatic, which crowdfunds event ticket sales. Like Teespring, the platform asks users to come up with a monetary goal (like the break-even point) that a potential event must meet before the planner commits to it. And since the number of attendees can be estimated from ticket pre-orders, an event planner has a better idea of how much space to rent and food to cater.

That’s not to say that crowdfunding doesn't have its flaws when it comes to market research. A well-targeted crowdfunding campaign may meet its goal but exhaust the customer base for the product, for example, making the creator too hopeful about a product's appeal to a wider audience.

On the other hand, a poorly marketed campaign may fail not because the audience isn’t there, but because the right people didn’t hear about the product (who wouldn’t want one of these awesome bear posters?). That’s why crowdfunding consultants suggest starting to build an audience early – months in advance, in some cases.

Have a favorite example or a personal story about how crowdfunding helps reduce risk? Share it in the comments below!

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