The opportunity cost of crowdfunding

The opportunity cost for backers in the crowdfunding process has a real monetary value as well as a non-monetary value.

Key takeaways

  • The monetary value of the opportunity cost is the amount pledged plus any additional income that could have been earned on this amount.
  • The non-monetary value of the opportunity cost is time and foregone benefits.

What is opportunity cost?

Opportunity cost can be defined as the value of the best alternative foregone (source: Wikipedia).

For example, if I am busy creating an educational video for my website, and my friend asks me to go to the movies, either option has an opportunity cost. If I go to the movies and don’t complete the video, the opportunity cost is my time multiplied by potential lost revenue. If I complete the video, the opportunity cost is the price of the movie ticket and spending time with my friend.

Opportunity cost has a monetary value, as well as a real cost of lost time, missed opportunities or other missed benefits.

What are the opportunity costs for a backer in a crowdfunding transaction?

The opportunity costs are:

1) monetary opportunity cost, namely the pledge has a monetary value. If I pledge $40 and the campaign succeeds, I immediately pay the $40 but have to wait to get my commensurate reward. I could have used the $40 for any other purchase and actually received a product or service in return. If I would have invested the money or paid of some debt, the opportunity cost is larger than $40 due to the interest I could have accrued or saved.

2) non-monetary opportunity cost, which can be any of the following:

  • time taken to research all the projects available on Kickstarter;
  • time taken to research a specific project and project creator;
  • time spent interacting with the project creator to address queries or concerns;
  • the forgone benefit of not receiving the reward immediately on payment;
  • the expectation of a future delivery that may or may not materialise.

The time spent on Kickstarter could be used to create my own content or spend time with my friends, but instead I choose to support project creators. This is part of the reason why delivery failure from the project creator is a heavy cost to bear for backers.