Depending on the motivations of the project creator, they may or may not add a retailer reward to the backing options. Of the 24 projects I backed, five had retailer rewards. This can be represented as follows:
I was surprised by the Design and Stationery projects not having a retailer reward, but felt re-assured that, on average, my backed game projects had retailer rewards offered. Retailer rewards are not the same as multi-buy options, in that the reward description clearly states retailer. I admit that the multi-buy option may be used by retailers, but there is no visibility of this on the project page, and accordingly, the multi-buy option is excluded from the above analysis.
In this post, I will try to understand why retailers would consider backing a crowdfunded project.
- A retailer would back a crowdfunded project if the project is ready for market, there is an acceptable margin, and the selling of the product will benefit the retailer.
- Crowdfunding may not be suitable for a retailer’s business model, and the crowdfunding process may exclude retailers from active participation.
- The offer of retailer rewards may help subsidize individual backers’ pledges and help push the project to get funded faster and unlock more stretch goals.
Why would a retailer back a crowdfunding project?
A retailer is not a philanthropic investor in start-up ventures or new product lines; the retailer seeks to make a profit from his customers. A retailer would back a project if:
- the product is ready for market;
- the guarantee of delivery is high;
- the target market is clearly defined and willing to buy the product (as can be seen from the number of backers backing the projects);
- the margin from selling the product is high enough to compensate for the risk of the crowdfunding venture;
- the exclusivity of being one of the first retailers of the product will attract customers to store;
- the retailer is known as a supplier of exclusive, or hard-to-find, or limited editions goods, and the product falls into this category.
If a crowdfunding projects fails, or delivers late, the risk to the retailer is limited. The money can be written off or the retailer can claim from trade credit insurance. The risk may be higher if the retailer was using a product as part of a seasonal campaign and can’t easily be substituted. In general, the risk to a retailer is lower compared to an individual backer, simply because the retailer is an established business.
Why are more retailers not backing projects?
Given this risk/reward profile for retail backers, where are they? Retailers currently have a low profile as backers in the crowdfunding sector, and potential reasons for this are explored below.
The main reason could be simply because Kickstarter limited the number of rewards a backer can pledge for. A backer can only pledge for 10 copies of a reward. As a retailer, stocking 10 copies of a product is possibly not feasible. The loophole is that retailers can create multiple Kickstarter backer accounts, but the administration of these may become cumbersome, and there are no cost savings in shipping due from the bulk buying.
A deterrent in the crowdfunding transaction is the legal contract between the retailer and project creator. Instead of pursuing the crowdfunding route, a retailer may well contact a project creator separately and negotiate a supply of products.
Another deterrent is that the crowdfunding business model does not align to the usual retailer business model – it disrupts the usual business model. This is a benefit for individual backers but not necessarily for retailers.
A small retailer may not be willing to take the risk. If the small retailer is at the start-up stages of their own business, a crowdfunding transaction carries more risk.
A retailer may consider the consider physical space that a crowdfunded product would occupy in their store. How would the retailer balance space for branded products with established higher appeal to the consumer with space needed for a crowdfunded product?
The search costs in crowdfunding are higher for a retailer, and it is unclear whether project creators are actively marketing to retailers. All though I have no conclusive evidence, I doubt that the buyers for large retailers are actively searching crowdfunding platforms for new products.
The lack of retailers in crowdfunding may point to the risk of doing business with small and medium businesses. Maybe if the project creator has successfully delivered on previous crowdfunded projects, and has gained a reputation for this, retailers would be more interested.
Lastly, crowdfunding is aimed towards the general public; the model isn’t set-up to be an add-on to the existing supply and manufacturing chain. Retailers may simply not back projects because crowdfunding is for early adopters and innovators; in effect, most retailers are excluded by this model.
All in all, having retailer backers seems to have an overall positive effect on the crowdfunding project: it encourages individual backers and makes the project less risky. For retailers, the risk/reward trade-off is a balance between legal contract, product space and appeal of the crowdfunded product.