Production costs and fulfillment costs seem to go hand in hand, which is why making a profitable Kickstarter is so hard. Often you are selling something which has not yet realized it’s full cost. This guide is to help you use crowdfunding strategy and basic accounting to design a Kickstarter which actually makes you money, instead of the other direction.
Understanding Cost of Goods Sold
This is the ultimate number which you will arrive at, once your Kickstarter product is inside peoples hands. But it is also the hardest to calculate up front. Use our simplified Kickstarter cost of goods sold calculator, to make sure that after all is said and done, you walk away with a profit margin, and not a loss.
Kickstarter can cause capital loss, because it has higher unexpected costs. The symptoms of losing money is a common occurrence for first-time business owners, because in the creation and distribution of a new product, there are always common unexpected challenges. This goes way beyond just the fees charged by the platform, or the cost of shipping.
There is a lot that goes on in making a Kickstarter. The marketing cost itself is immense. Keep reading to learn more about why crowdfunding accounting is an important missing step in launching your project.
What turns a Wildly successful Kickstarter into a Bad Business Decision?
From a psychological standpoint, it’s easy to think you’ve done a great job by raising $60,000 for your new business. But depending on who helped you make it, and the way the money was used, you can end up spending even more than you earned just to get the rewards into people’s hands.
In spite of the negative possibilities known, many business people decide to launch a Kickstarter anyway, and they proceed with the Kickstarter video production, and the like. It’s understandable how it slips the minds of most small scale new to the industry crowdfunding projects, because there are so many combined hidden costs.
Kickstarters are business liabilities, unless you manage the production costs from end to end, before deciding on your goal, and how much you have to put toward your marketing cost. By working backward with the typical production fees, you can arrive at an understanding of how much kickstarter you can afford.
– [ ] Credit fee
– [ ] Platform fee
– [ ] Office fee
Moving money around is a big deal, and they take a Chunk. For safety , decide that 10% of your revenues will be eaten up on their way into and out of your account. The office fee is your banking costs, your costs for your accounting software, your costs for the support you will need in organizing everyone, and making sure your vendors get paid, and making sure you have things like mailers and a stamps machine.
Visual Content Costs, and Marketing Costs:
Sometimes people think marketing is simply one thing, but actually it is split into two categories, how you make the pitch content, and what you pay to push that pitch content to people. (Or even know the right people to push to).
So for visual content alone, you should expect to hire a cinematographer and kickstarter videographer, or even partner with a crowdfunding launch company. Easily 30% of your Revenues from your kickstarter will be used to pay back the marketing, and it is usually split down the middle in terms of how much. So if you raise $100,000 USD, expect to spend $30,000 on your marketing.
– [ ] $12,000 – All things related to your visual content (Video and Images)
– [ ] $3,000 – All things related to your page writing, your website writing, and your emails and social media posts writing
– [ ] $5,000 – The advertising marketing company will use this to make hundreds of customized ads, and to train the marketing bot for reaching the right people. This is a low conversion time in the marketing, as you are training the system
– [ ] $10,000 – The advertising marketing company will use this budget for your actual campaign. Targeted to the right people at $1,50 per click, this will guarantee that at least 6,500 people see your project. This is important because you will only have a 3% conversation rate. At a 3% conversion rate, you will have sold 195 units, which was your minimum for the successful product.
Key Takeaway: Make sure you price your rewards accordingly, because for a 50% profit on the marketing, (which you will need to break even for your production costs), you will need to raise at least $60,000 . If you need to make 60,000 from only selling 195 units, than the minimum cost of your Kickstarter reward should be $300.
But wait, my product is only $79!!
Well, we hate to say it, but the customer acquisition cost and the cost per acquisition is probably around $80. That’s might get you to sell the product, but you will have no money left even for the fulfillment.
This is why a $300 minimum product fee, is essential, and it’s also why any sane person would demand that they get $100,000 from the campaign, and not just $60,000, because it is only in the domain of 60-100k that campaigns can become profitable.
– [ ] Making the packaging that your product will fit into
– [ ] Making the technical user guide
– [ ] Printing the slip in user guide and marketing contents
– [ ] Software fees for getting responses from your backers
– [ ] Costs related to customer customization
– [ ] Fee’s paid out to your affiliates and anyone who helped spread the word about your project
For safety, assume that outside of your manufacturing cost, that 15% of your revenue will be used during the pre-fulfillment stage.
Getting your retail product out to market is the part that most product developers think of. It is a whole huge part of what it takes to actually come through on your promises. Expect 40% of your revenues to go to fulfilling the manufacturing side of your product.
– [ ] Moulding
– [ ] Assembling
– [ ] Core Pieces
– [ ] Packaging sent to them
– [ ] Paying Vendors
– [ ] Paying Factories
– [ ] Paying Shipping
Fulfillment and Shipping Costs
Getting the final product to your customer is not easy either. Whether you have a drop shipper or do it yourself, shipping is a whole helluva lots more difficult than you think. Without a corporate or freight account, you will be paying retail shipping grates, and some rewards are heavy.
Expect to pay 5% of your revenues – $18 per shipment, or a minimum of $3,000, just for your basic costs.
– [ ] Postage
– [ ] Handling
– [ ] Insurance
– [ ] Tracking
We would set aside another 10% for unrelated fees, everything from what you have to pay your assistant, to the fuel and freight cost from your manufacturer, it helps you have a margin of error, in case you eventually discover what was you actual cost of goods sold.
Bringing It all Together – What Is your Kickstarter Accounting Cost and Your Crowdfunding Profit Margin?
– [ ] Transaction Fees: 10%
– [ ] Visual and Marketing: 30%
– [ ] Pre-Fulfillment: 15%
– [ ] Manufacturing: 40%
– [ ] Shipping: 5%
– [ ] Other Costs: 10%
Total Profit Margin: -10%.
(Negative 10%. Umm… I thought we were starting a business?)
Now you see why it is so hard to earn $60,000 for your new project and to keep anything for yourself. That is why we so strongly suggest putting your stretch goal at $100,000 USD, that way you can swing the numbers more in your favor, to even eek out a +10% Profit Margin.
Here are a few things you can to to increase the profit margin of your kickstarter:
– [ ] Increase the per unit reward cost of $400.
– [ ] Don’t use the 10% Other costs and be a smart business person, so that your margin of error become applied to your profit margin
– [ ] Spend less on your video
– [ ] Hit a larger goal by adding +$5000 more dollars to your click ad spend
– [ ] Save 15% by getting your friends to pledge
Let’s take a look at these in depth
Spend Less Money
It all comes down to the final tally. If you look for every opportunity to save on cost, it will turn your kickstarter from a net draw, into a net profit. Let’s look at how.
Increase the Per Unit Reward Price – Your Crowdfunding Promotion Earns More
When you use an upsell, you can still sell your unit for $300, and recoup $100 of bonuses on the backend. Is there any key feature that you can subtract from the main product, only to add-in later, during the survey checkout process, which will inspire 2/3rds of your backers to opt in to more? If not, is there any thing you can add now, as a product feature, which would merit the 25% increase?
Don’t use your emergency fund – Best online fundraising approach
That extra 10% we set aside for your mistakes can be THE THING that gets you to a break even point. No extra snacks. Do not let your agency charge you for extra snacks. Make them write into the contract “nothing besides the snacks names here will be charged, we confirm that nothing in addition the contract amount will be billed to the client.” If they do charge you, don’t pay. Direct them toward your agreement. You do not have to pay for services you didn’t ask for, or things you didn’t know you were getting. The same goes for your manufacturer. Put it all on paper ahead of time. If someone pushes you, aim and shoot. If you agency or manufacturer or anyone else for that matters asks for more than you agreed, they deserve to be rewarded with a “crisis” on their hands. It’s better to be the mean client which gets so upset that the case goest to the agency owner, rather than the pacifying client who agrees to pay more.
Make a Video For Less – Crowd Funding Help
Choosing to go the professional route is a given, if you want your marketing to succeed and stand a chance to air on the public networks. But what most video studios won’t tell you is that they are padding the fees for just about everyone involved. Models $500? How about $250. Equipment $800? How about $400. Editing $4000? Why not $3000. If your favorite video partner is coming in higher than you’d hope, you an write back with your own budget, and show the allocations, and ask – can you do it for this? More than frequently you will get a reply where they are willing to budge on certain, if not all costs.
And if negotiation with boutique video studios is not your favorite thing, then come over and save 50% on your agency fee by working with Start Motion Media. Our full service creative production staff are available for months at time for your project, with out the door costs staring at $7500 (with payment plans), a full 50% below what many of the other highest class video studios charge.
Hit a Larger Kickstarter Project Goal:
There is only one place in your kickstarter accounting case study that has a linear affect on your revenues. This means that of all the places you can decide to add more money, there is only one category where it will have any impact at all. That is in your ads, once the social media advertising machine is trained. So I would say if you can change your $10,000 click ads budget to $15,000, (a 33% increase), that you would also see a 33% increase in the amount of revenue that you receive.
Save 15% (100% of your Ad costs) by getting friends to pledge as backers
This is the one and only way for moving the needle so that your Kickstarter and really any crowdfunding can of itself be profitable. Wouldn’t it be nice to at least make $10,000 back , after you had invested so much in manufacturing your first round product? Some companies don’t care about their Kickstarter being profitable, because it is a loss leader marketing campaign. However. I personally would not want to be liable for having got do a second round of sales just to make up for my first round of sales. The way that (even small) Kickstarter’s make a huge leap into profitability territory is to make sure that you have lots and lots of “unpaid leads” – these are people you bring to your campaign through manual (existing relationship) methods.
The real way to crowdfund (The TOP Kickstarter Strategy)
You will become a profitable campaign if half of the backers were not needing to charge the $80 cost per aquisition. Right away your profits on $300 will jump by approx 30%, which is the needed margin to make it all work. Think of going through your whole phone book and your whole email contacts of everyone in the whole freaking world that you know. Make a list of their emails, and assign Y/N Categories – which of these people do you feel is at least 1/3 (one third) likely to have enough money and interest to buy my product? Once you have your targeted friends list, start marketing to them. But remember marketing to friends is a completely different kind of conversation.
The way to reach out to a friend and have them actually give you money and feel good about it is the following:
– [ ] Text them “Hi how are you, was thinking of you”
– [ ] If you don’t hear back, follow up in three days; “Hi did you get my last message? Was just checking in I hope you are ok”
– [ ] You will hear back after the second message
– [ ] Acknowledge them for what they shared and then add a first tip about your project; “actually I’ve been working on … and I am about to go into manufacturing!”
– [ ] Wait for their reply
– [ ] Then ask – “I am still working on the page and don’t know if it makes sense, could you review it for me?”
– [ ] They say yes
– [ ] Reply – “OK great I will send you a link when it’s ready”
This way, someone is warm and ready when they receive a product sales page with a price tag on it. And if you include them at pre-launch, they don’t feel rushed, which is a major bonus. Any feedback they give you is pure gold – customer research, but it also serves them to feel an emotional bond to your project. Once the bond and warmth is there, it is only a short step forward, to tell them “We’re live, would. You be a backer?”
This is the only way to get past the huge gulf of asking your friends for money, where both parties still feel good. And the best part is a backer from this marketing method is a full 1/3 more profitable than one you have to use paid ads for. I always recommend that my clients drive the first $30,000 of their kickstarter pledges this way, both for creating more trust and foundation in the project, and also for moving the needle so that their final ut the door cost of goods sold is still allowing for a small profit.
I hope this ultra crowdfunding accounting guide has been helpful, cheers to your success!
–From the Author: Michael Zeligs has launched hundreds of successful kickstarters since 2009, and he is the founder and chief operating officer of Start Motion Media, an affordable kickstarter video production company.