Pricing is one of the most important aspects to consider before launching a crowdfunding campaign. Your final figure that you would set as the crowdfunding goal will most probably be determined by how much revenue you think you can generate, and this will, in turn, be reached by your chosen price and how many units can be sold at that price.The irrevocable rule for pricing a product is that the price should cover not only the cost of goods sold but also generate a profit.
Essentially, there are two main parts to pricing—cost and profit. The price must cover the tentative cost of manufacturing each unit. It must also include a markup that factors in the benefits of your innovation and that your backers would be willing to pay. In other words, the price must cover the cost and generate a profit while duly justifying the value it supposedly will deliver to the supporters. Additionally, make sure that you do not underprice or overprice your campaign.
Because pricing is one of the hardest challenges for crowdfunders, here is a quick summary on how to price your product appropriately:
Calculate a tentative cost of production
Most likely, your product is still a prototype, and you do not have a concrete idea of what the actual cost of production would be. Therefore, all you can do is calculate a tentative cost of production. Below are the major cost centers you will need to take under consideration when calculating the cost of goods sold:
- Cost of materials – Raw materials are one of the primary cost centers. This includes primary/direct materials as well as indirect materials required to make the product and further accessorize it. For example, if you are developing an innovative wooden chair that can also be converted into a swing, rocking chair, and bed, the direct material used would be wood, and the indirect material would be nuts, bolts, polish, etc.
- Labor and machinery – Another principal cost is the labor involved in the production. The labor cost will include the wages and employee benefits provided to workers. Also, the price of machinery and petty equipments used for manufacturing will increase the cost, if not outsourced to a third party.
- R&D and consulting – The research and development conducted when you are making the product will incur a fair amount of cost. Consulting may also play an important part and incur its own costs. You will require consulting for vendor sourcing, designing, handling legalities, and many more things.
- Marketing and promotion – To achieve your crowdfunding goal, you will need to spend money on advertising. You will be doing sponsored campaigns on social media platforms and attending events and seminars to promote your project. All of this will incur a good amount of outlay.
- Miscellaneous – There are other miscellaneous costs involved such as salaries, rent, utilities, office supplies, and insurance.
- Cost of shipping – One of the major cost centers of your whole crowdfunding project is fulfillment and shipping. This will include the costs incurred for warehousing, packaging, documentation, transit, and customs duties. Understand that ignoring the shipping cost while pricing your product can cause a severe financial setback to your project. From packaging the good securely to ensuring that the shipment is delivered on or before the date promised to the backer, there are several expenses drawn in at every step. It is best to discuss the onset of special costs that may happen during shipping and how these costs may be dealt with explicitly on your campaign page and individually to every backer. What I think is that the best way to
Bulk pricing – Crowdfunding a product is usually an offer to pre-order. Many times, campaigners are approached by a group of backers who ask for a discounted price in exchange of a bulk order. Backersclub is one such platform that solicits special prices and/or add-ons from the campaigner and places them in front of serial backers who are enthusiastic about your type of products. It is a sort of reseller program. If you are interested in participating in these types of programs, you will need to be very pragmatic while extending a discount. You might benefit from economies of scale by increasing the sale volume, as it will decrease the per unit fixed cost. However, an over-the-top discount can cripple your project.
Competitive pricing – Crowdfunding usually works for products that are out of the box, unique, and very different. This exclusivity means that in ideal conditions, these products will have zero competition. Therefore, the emphasis placed on applying competitive pricing is rather small. Nonetheless, taking a look at the pricing structure of other products in your category may provide you with a better approach while pricing your product. Hence, do spare some time browsing the pre-order rates of similar products
Add a mark-up – Once you have arrived at the cost of the product using all the components mentioned above, it is time to add a markup on the product. Please note, because the cost you have calculated is a tentative one, the markup that you receive will help you face unwanted contingencies that are almost certain to come up. Also, the remaining revenue after bearing the cost of production and managing contingencies can be used to prepare for entering the marketplace after the crowdfunding round.
The final takeaway
Crowdfunding is a rollercoaster journey for campaigners, and one of the biggest bounces you experience is figuring out the price of the product. It becomes even more challenging when the product is still a concept, and you are not entirely sure about the actual cost of production. In addition, there is the possibility of unexpected events occurring that will escalate your cost of production further.
Therefore, while doing the math, make sure that the final price is covers the cost of goods sold, a markup, and a little margin over that to handle any possible contingencies. Besides, the price must justify the value it will deliver to the backers, or you may discourage the prospective supporters.