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Designing the Best Reward Structure for Crowdfunding Campaigns

What are the best strategies to avoid crowdfunding failure?

As entrepreneurs and innovators increasingly turn to reward-based crowdfunding to finance their startups, Georgia Tech Scheller College of Business researchers are taking a look at the factors that contribute to crowdfunding success.

Crowdfunding is often seen as a win-win for both the business and its backers. The startups gain much-needed funds—and in return, backers who invest in the campaign receive pre-determined non-financial rewards in the form of innovative products or experiences that may be unavailable elsewhere. Most crowdfunding platforms are all or nothing—project creators must raise the funds before the deadline expires or they receive none of the money raised.

“An alternative to IPOs or private equity, crowdfunding allows business creators and innovators to solicit funds without giving up a stake in their companies,” explains Georgia Tech Professor Manpreet Hora. “Unfortunately, the majority of crowdfunding campaigns fail.”

To determine what factors contribute toward a successful crowdfunding campaign, Georgia Tech researchers Hora, Karthik Ramachandran and Param Chhabra examined almost 200,000 Kickstarter campaigns. Their findings can be found in the working paper, Designing the Reward Structure for Crowdfunding Campaigns.

“We sought to empirically answer the question: What’s the best way for a crowdfunding campaign to raise the money it is looking for?” says Chhabra.

 They grouped their findings into three main categories.

  1. The number of rewards. When it comes to rewards, a happy medium is the way to go. “If you offer too many rewards, fatigue sets in,” says Ramachandran. “But, if you offer too few, people tend to skip over your campaign. Think of it like a grocery store, if you are looking at jams and there are just two jars, you would probably not buy as there are not enough choices. On the other hand, 100 different jars might cause indecision and confusion.”
  2. Dispersion of reward prices. Less variance is better. “Keep the prices reasonably close,” advises Chhabra. “If you offer too much dispersion in prices, say one reward for $25 and another for $2,500, you will be less likely to attract backers.”
  3. Businesses with more crowdfunding experience can offer less rewards. Businesses with more experience on the platform are viewed as more legitimate and trustworthy. Regardless of whether your last campaign was successful or not, the number of rewards doesn’t outweigh the experience. “Campaigns that are new to the platform are better off offering more rewards,” says Ramachandran.

In addition and—contrary to their initial expectations—they found the benefit of offering more rewards to be greater for campaigns with experiential rewards (rather than product rewards) in certain situations. “The number of rewards plays a more nuanced role in accruing benefits to entrepreneurs when comparing experiential rewards to product rewards,” explains Hora. “If the objective of the campaigns is to have a higher probability of achieving their goal by raising the funds within the allotted time period, then campaigns with a higher number of experiential rewards are more beneficial. Conversely, if the objective is to raise a higher funding amount, then campaigns with a higher number of product rewards are more beneficial.”

Hora, Ramachandran, and Chhabra are excited about the value of the study. “Our paper provides guidelines Kickstarter innovators and creators can use to improve the design of their campaigns—and ultimately to raise the money they need,” sums up Hora.

To find out more about their research methods and the results,  read the entire paper: Designing the Reward Structure for Crowdfunding Campaigns

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