Kickstarter Math is Weird08/31/2015 at 10:32 am | Posted in 1904 | Comments Off on Kickstarter Math is Weird
or, Spreadsheets are the Best Things in the World. (This blog post also lives at http://mariancall.com/kickstarter-math-is-weird/.)
This is a loooooong blog post for you numbers and crowdfunding nerds,* so if you’re instantly bored, just trust me, Kickstarter math is weird! This is not a walk in the park as reading goes and I’m not the best writer.
But if you are planning on crowdfunding anything anytime soon — I beg you to read this, think through your own project, and make your own spreadsheets.
Because you should do LOTS of weird Kickstarter math before you crowdfund anything.
(Here, I made you a spreadsheet to practice! It’s explained and screencapped throughout this article. For our purposes I made variables red rather than negatives, so they jump out at you.)
How Much Do I Have to Raise?
Say you want to fundraise to make a thing, and the thing you want to make is My New Album — hooray! So first you make a budget, then you set that as our Kickstarter goal, right? Easy! No.
So how much should you ask for? And how much do you really need?
I’m in the middle of this real fundraiser right now, though many of the numbers below have been changed to protect the innocent. My base budget for this album is about $35-40,000. That includes lots of musicians, studios, travel, album art, CD manufacturing, mixing/mastering, buying lunch for the band on long studio days, making music videos, and paying rent while I work on the album — albums don’t yield monthly dividends til they’re done.
My budget is based on real numbers and quotes, not guesses, down to exact airfare and realistic food estimates. Don’t ever guess on your project budget — you probably don’t have to. A little research, a few phone calls, will save you a lot of trouble.
Having done my research and adding some wiggle room for mistakes and do-overs — $40k is my ideal project budget.
But I also need to know what my minimum budget is. What is my project budget that does not include wiggle room or strings and horns or backup singers or videos? About $30,000. We can survive without those things if necessary.
And I can subtract from that $30,000 my own investment and other fundraising. I raise money in lots of ways, applying for grants, holding special concerts, and bringing in private donors. I also ante up myself — I invest as much as I personally can in my project. So let’s say I can knock $8,000-9000 off my budget through my own funding and other folks’ purchases outside of Kickstarter. Now I’m at around $22,000 — that’s the bare minimum I have to raise! Step one completed.
Step two: figure out how much you can fundraise.
How much you can raise and how much you need to raise are totally unrelated numbers, sorry to say — you might need $100,000 but if you can only raise $5000, ask for $5000, and deliver what you’re promising to those backers. Or change what you plan to make.
Crowdfunding is not a magical wishing well, it’s a community. The “crowd” that you petition is a family you build over a very long time with very hard work. If you don’t have a crowd yet, fund your work some other way. You have to know who will be supporting you (their names and faces and kids) and you have to know what they want. You have to be able to estimate how much they will pay, individually and as a group.
I have done a lot of fundraising in the past, and I know my audience pretty well. But I still need to run a few different scenarios. I mean, think through all the things that can go wrong and right during your campaign:
- What if my fans have crowdfunding exhaustion? They absolutely do.
- What if a couple of reliable big donors don’t turn up like I expect? Do not assume they’re in; they don’t owe you, and they don’t always show up.
- What if they’re not as interested in this project as they were in my last one? That is absolutely possible, there are newer shinier projects out there.
- What if I somehow go viral and have thousands more backers than I expect — can I cope with the workload? Many Kickstarters tank even in spectacular success. A surprise $2,000,000 can bankrupt a project that would have been solvent at $2000.
- What if the news is really awful when my campaign ends/when my record launches and I can’t promote? This happened to me during Hurricane Sandy; media outlets that promised coverage were literally underwater and of course did not run stories. Some factors are totally out of your control.
You never know exactly how much you will fundraise, even if you’ve done it before. So be prepared for every scenario.
Scenarios are your friend.
To that end, I have a spreadsheet running scenarios like this on my $30,918 budget:
Check this out: I appear to raise $30,000, the entire budget for my record, but I still lose $3,944. And that’s after I invest $8089 from other sources. Without my additional investment…
…My take-home cash to make my record is $18,884 if I raise $30,000.
But all $30k that you raised is taxable. It’s taxable at the federal, state, and local level. And you might have to pay sales tax, too, on behalf of some of your backers (always collect the zip codes of your backers, even for digital goods!). You can write off of your expenses if you are a business, so ask yourself: are you a business? If you are, do you have a city and state business license, and relevant insurance — and do you need them? This is your job to find out.
If you are selling an item, including a digital item, you probably need a business license in your state. They’re easy to get for most business owners, and you should have one. You should probably also have a bank account separate from your personal account to keep track of your funds. Expect a 1099-K from Kickstarter or your crowdfunding site. Even if you fundraise on your own, without a platform, Paypal or Square (or whoever processes your payments) will send you a 1099-K or another statement. And in January, send 1099-MISC forms to everyone that you paid, even friends and bandmates.
Once you use a crowdfunding platform your days of under-the-table business are behind you. This is real income, you have to report it, and you have to pay taxes on it. In some states you can’t write off business expenses, so you may owe state income taxes on the entire amount. You should know things like this before finalizing your budget. Taxes are not the end of the world, but they *are* a variable you need to build into your budget so that you raise the right amount. Know what your tax burden will be, and you won’t get bit!
In the end, though, your crowdfunding goal should be determined by the amount your crowdfunding community can cheerfully bear. No begging and pleading, no desperation or self-flagellation should enter into it — they want to see themselves climbing this mountain together in a spirit of fun and enthusiasm. Don’t set an amount higher than the spirit of the crowd can joyfully conquer. If you need more, you have to come up with the rest on your own.
In the end I’m not totally confident I *can* raise $30k, if something goes wrong or I fail to get momentum. I decide $25,000 is my public Kickstarter goal — that’s my minimum confidence goal. If I only earn $25k, leaving me a balance of -$8010, I have a plan. I will do a spring fundraiser on a smaller scale, I know roughly how much I can raise with that, though it’s tons of extra work. And I will scrimp and save and fight and make the record right.
So I ask for $25,000 with a plan in place if I barely make it — even though I need and I expect a lot more money than that. This is smarter than asking for $40,000 and missing my goal entirely.
Your Rewards Are Underpriced
I can say this with confidence because almost everyone’s rewards are underpriced. Especially CD’s and DVD’s. You can’t sell a CD during a Kickstarter for the same amount as in the store (if there were still any stores that carried CD’s). Let’s do some spreadsheet action on our reward levels.
You have to choose reward levels that make sense for your backers — how much will they want to spend on you? How can you incentivize them to spend a little more instead of automatically opting in at the minimum level? But you also have to choose reward levels that make sense for your fundraising. I ran my numbers over and over and decided $42 was the lowest tier that allows shipping. I had to repeatedly raise a lot of the reward levels to stay out of the red.
After a lot of thought, these are my rewards. Lots of cheap affordable stuff, but plenty of higher tier stuff too. I asked my fans many times what they want, and their answers informed what I plan to make. Shiny!
A word on shipping:
As Kickstarter raises your grand total, that exciting big number on your project page, it includes what people are paying for shipping. So you have to include that in your costs.
This means you need to know what every reward tier will cost to pack and ship **for real** in advance. You can’t guess, you have to know. Look at actual shipping supply prices — you might be surprised how much CD mailers cost even in bulk, and extra bubble wrap isn’t cheap. If you’re shipping something flat that needs to arrive in good shape, handwritten lyrics or letters, you can’t just put it in a manila envelope; you need a protective sleeve, heavy backing, and a protective mailer *at minimum.* That costs plenty per unit.
Triple-check your postage charges too (international shipping is always more than you think). High-level backers getting irreplaceable or exclusive items deserve tracking, maybe insurance and priority service.
And remember how many days it might take you to package the goods themselves once they’re done. If you’re having friends over to help, think about how much pizza you’ll have to buy. What will all that cost? You get to set the shipping costs to the backer — so know exactly what the costs will be. And don’t lowball shipping, it can undermine your budget.
To the right are my reward tiers listed again, this time including what my average backer has paid for shipping (about 1 in 10 are international backers so I round up a bit). Again, as my kickstarter funding goes up, allllll those postage charges are making my total look really high when I haven’t reached any of my funding goals yet. If most of my backers chose the $42 level, for example, roughly 10% of the funds in the pot would be shipping money, not project money. You can’t imagine that you have it to spend. Spreadsheet to the rescue!
Now calculate the cost of the rewards themselves.
I’ve made mistakes with rewards many times — I’ve had reward tiers that hardly contributed to my project budget at all, I made things that can’t be replaced or re-mailed if lost, I didn’t get exact cost estimates in advance, I didn’t plan for wild success and limit my rewards, and worst of all I didn’t pay myself for the months it would take to fulfill everything.
So. Calculate how much each of your reward levels will cost you — include your time as well as your money, because time *is* money. No one will pay your rent for you while you fulfill Kickstarter rewards, and if you keep halting reward fulfillment to do other work, you’ll deliver very very late.
Here is my “optimistic” fulfillment costs estimate table (numbers are inaccurate btw, these are old). See the right columns:
“Profit margin” in the last column is a misnomer here. I’m not really profiting — the “profit” is just leftover money that goes to pay for Kickstarter fees, taxes, and the project budget. And the project budget is ALSO a cost of fulfillment, it just amortizes differently. Everything I raise here goes to reward fulfillment, even the part that buys my band burgers and gets the engineer coffee.
For this Kickstarter I specifically chose only rewards that have a really high so-called “profit margin” and ship easily. I rejected things like T-shirts, vinyl, posters, USB sticks, trinkets, and anything that ships in a tube. The most labor- and cost-intensive item will probably be the Apocrypha, a chapbook of poetry, but I have it half-finished and I know what it will cost to print and ship. Like I said, I learned a lot about choosing rewards last time.
Know exactly what your rewards at each level will cost you. And allow for overruns.
Ask yourself what could go wrong with rewards fulfillment or the project itself, and how much it would cost you to do it over. Think through potential mistakes in detail and know how you would deal with them. If your CD’s arrive all wrong and you have to pay to reprint, will you go bankrupt & lose months of your life? Or will you take a hit but be OK? Build space into your budget and schedule t0 do things over (you will probably have to do some things over).
As you calculate the cost of goods per reward tier, remember that not all goods can be calculated “per unit” since you have to buy more than you need — CD’s are $1-5 per unit, right, but you have to order 1000 at a time. Any costs that do not depend on the number of backers should go in your project budget, not in your reward tier costs.
Fulfilling CD’s will not cost you $1-5 plus shipping per backer, it will cost you $1000-5000 no matter how many backers you have. So, again: put it in your project budget, NOT your reward tier costs. I made this budgeting mistake early on in this Kickstarter and had to recalibrate pronto.
And remember that your full digital download or cheapest physical version is likely to be your most popular reward. I often see musicians and filmmakers selling their CD or DVD for $15-20 — which means most of their fans will back at that level & no higher, which means the artists will have a REALLY hard time making the actual project. Maybe it feels like a lot to ask for more than $15-20, but people aren’t just buying a CD — they are bringing a CD into existence out of thin air, and that is harder to do.
How Will Your Crowdfunders Crowd, or
Will It Fund?
Kickstarter says the most common pledge is $25, and they have great data on what crowds typically do.
But what will YOUR crowd do?
All your backers are individual people making individual choices about what they want and what they can afford. And often they surprise you.
There’s another scenario we need to run: what happens if your backers crowd or ignore certain reward tiers?
This happened to me last time — I was shocked when my average backer donation was over $70, absurdly high, because my USB stick reward level sparked people’s imagination (thankfully I set it at $125 and not lower). I wound up in the hole compared to my projections; the USB sticks cost far more than I planned, and it took me over a month to load each USB stick one at a time on my laptop. I delivered late and I delivered broke.
So now I run all sorts of different backer scenarios, and you should too.
Run scenarios where everyone backs a specific tier, especially a tier you don’t expect. If you have a reward that is expensive to fulfill (for me, $125) and everyone flocks to it, will you still have enough for the main project budget?
You have to be solvent if people hit your highest rewards harder than you expect, but also if NOBODY takes your top rewards. Run your scenario with almost everyone backing at $50 or less, and then with most backing at $50 or more.
Try to break your funding, until you are sure your funding always works no matter what the crowd does.
Scenario 1, getting over $40k:
We plug that fc/tf ratio back into your overall Kickstarter funding plan, just like taxes and Kickstarter fees (the highlighted cells below). You can see the difference between a .13 and a .20 fc/tf ratio:
You can change that little crucial ratio yourself by altering your reward tiers and the reward costs before you launch, but your crowd can also change the ratio for you after you launch, and they don’t always change it for the better.
If the crowd chooses these rewards more than those ones, you can fulfill your public goal, stay on budget, and still wind up in the hole.
Many project creators don’t even know when this is happening to them, and they have trouble identifying *later* that it happened at all. They’re just over budget in the end and not sure why, since all costs worked out just like they anticipated. You can pass a dozen awesome stretch goals, you can get all your cost estimates right, but you still might not be solvent if your backers hit your high-cost tiers more than your low-cost ones.
So I kept changing my reward tiers and my costs and even the items I was offering until I could constrain my fc/tf ratio to between .09 and .16. I tested with every imaginable backer configuration before I launched.
And with 4 days left on my Kickstarter, I’m still keeping a close eye on it. To that end, I update my spreadsheet with the real numbers of backers day by day, so I know what my ratio is for real right now. And I’m still running my three different reward-fulfillment-cost scenarios — one pessimistic, one optimistic, and one in the middle. So I have some real-time assurance that even if my rewards fulfillment costs more than I expect, my project budget is safe.
That’s how I know when I can do stretch goals.
So if I need $40,000 to make the record — but a bunch of that money goes to taxes, shipping, Kickstarter fees, and rewards — how much exactly do I have to raise to hit my budget?
The answer: your budget is a moving target.
The more you raise, the more your budget goes up.
Some expenses go up just because art projects are expensive, and there are usually budgetary surprises. Plane tickets spiked for one of my recording trips, so I added that to my budget after this Kickstarter began. Mastering wasn’t included in the mixing quote I got — add that. Studio time at Studio X costs more than it did last year, add that. Better to know about overruns early.
But expenses also go up as you get more backers, because you have to make more stuff.
As I approach more than 500 CD preorders, it looks like I’ll have to manufacture 2000 CD’s instead of 1000 to have enough for the release. So I add an extra $2000-3000 to the budget. Getting 15 new backers can sometimes require you to make 1000 backers’ worth of stuff, your cost increases aren’t always proportional to the money you’re bringing in.
So expect your project budget to evolve. Track all the rewards that you will have to re-order if your numbers keep going up. Watch out for rewards that will take weeks of labor to fulfill if you get too many of them (limit the number available!).
But when you reeeeeally pass your project budget, when you’re finally in the green, it’s time for stretch goals right? RIGHT! STRETCH! EVERYONE LOVES STRETCH GOALS!
Think before you stretch. Stretch goals get sooooo many people in trouble.
They got me in trouble. They were fun and I don’t regret them for a moment, they came out great. But … damn, my stretch goals were difficult and public and embarrassing and impoverishing by the end. I wish I had done them *smarter.* Sigh.
My current Kickstarter funding goal was $25,000 but I knew I needed up to $40,000 to make the record and accompanying music videos. Here’s what my spreadsheet says about that, with a middling fc/tf ratio:
Obviously my stretch goals up to $50k must be either stuff I can do for free, with zero production and delivery costs — or else stuff I already had in my project budget, things I hoped to do anyway that I can pass along as stretches.
My stretch goals were to budget for strings/horns/backup singers on the album, plus some music videos. All of these were already in my ideal project budget, but optional.
So as we hit stretch goals my budget rose from bare minimum to ideal, and this is essentially what was happening (budget increments are not really accurate):
(You have to be careful announcing stretch goals like these that you *might do even if they don’t fund.* I’m not gonna leave strings off a studio album if it really needs strings. But if a project or stretch goal doesn’t fund and you do the thing anyway, there can be backlash. I mindfully chose to go public with these instrumentation/video stretch goals on day 2 of my Kickstarter, but only because it seemed certain by then that we could reach $40k. If funding had been slower, I would have chosen different stretch goals, keeping mum about how many instruments I wanted on the record.)
As we get closer to the fun optional stretch goals, things look better, but the project budget still has to go up for all the fun things — like a keyboard, prepping for a vinyl run, and new original songs:
See how my total funding is going up by $5000 increments, but my budget can barely handle $2000-3000 of added expenses in the same interval? That’s the space you have to accomplish stretch goals — including shipping/rewards fulfillment if your stretch goal needs to be fulfilled or shipped.
And notice again how $60,000 in funding with a .12 fc/tf ratio means you only take home $40,168 to make all your things.
Some people lay out all their stretch goals right from the start; I don’t think that’s wise. The Unfunded Kickstarter Graveyard is strewn with projects that listed stretch goals for $100,000 though they barely broke $2000. So many unhatched chickens carefully counted.
Instead of that approach, try calculating in real time how much funding you will have as you approach each new milestone — plug in your backers, see how much fulfillment may cost, see whether you’re truly in the black — THEN determine what you can spend on your next stretch goal. Keep a long list of stretch goal options in your back pocket, free and expensive alike — let the numbers tell you when you can actually manage your goals.
Don’t sink your own ship with stretch goals. They should help you fly, not weigh you down!
Let Me Sum Up
A few last recommendations, from the combined wisdom of my crowdfunding friends, my fans, and my own experience:
- Early bird rewards and late additions to the rewards just frustrate people.
- Anything that feels like a bait-and-switch frustrates people.
- A million Kickstarter updates will frustrate people.
- Asking all your backers to create a different account and begging them to buy extra stuff at checkout? The ultimate in frustration. YMMV if your fans very much want the bonus items. But if you want to sell something, sell it separately, you’ll earn far more off a crowdfunding platform.
- I recommend crowdfunding for your project after you have a good chunk of the work done, not at the very beginning. Show you’re invested already. Get skin in the game.
- Plan on spending tons of time monitoring your Kickstarter while it runs, it’s like a second job. Answer backer/potential backer emails quickly.
- It can be beneficial to fulfill very large rewards, $500-plus, outside of your crowdfunding platform — it can save you around 10%, which matters more at high levels. If you have dedicated fans open to this private arrangement, it’s wise, go for it, ideally before you launch your public campaign. Just be sure you track and fulfill that person’s order with the rest of your backers, and be sure you report the income appropriately.
- Only partner with another person for a crowdfunding project if you have a history of working with them. You have to be able to trust them completely — as in, you have many many years’ acquaintance and you’ve done previous projects. Even then, write up a simple contract between you and be clear on responsibilities. Good contracts make good friends.
- Get a separate checking and savings account for your Kickstarter money if it will take you more than a month to pay all the bills. Pay yourself from that account (whatever you’ve budgeted for your labor) and then try not to touch the money again except to fulfill your project.
- Send off your taxes to the IRS immediately if you can. Don’t let it get frittered away in budget overruns. Try to spend your project budget in the same calendar year as much as possible if you can write off business expenses. And for heaven’s sakes, know what you owe in state and municipal taxes, as per this important cautionary tale by my friend Glenn Fleishman.
- If you have friends who are willing to help with fulfillment and things, get organized for them. Have a system and supplies ready before they show up. And feed them. Say thank you a lot. Help them move.
- If someone is doing more work for you than just a day of envelope-stuffing, pay them. And budget to pay them. Pay for your artwork, pay for your photos, pay for the music on your Kickstarter video — use crowdfunding as an excuse to pay other people who do stuff like what you are doing.
- If you sell hundreds of a physical thing, bring in help — have Amazon or some other company do fulfillment for you; there are many many companies that specialize in making it easier/cheaper/more accurate than you can.
- You will receive tons of spam from people and companies promising to promote or fulfill your campaign. Ignore them all. Anyone whose help you truly want will not contact you, you’ll have to contact them.
- If you expect to be backed, back. If you expect people to pledge, pledge. If you expect strangers to stumble across your work and support it, fumble around the internet and support things you like. Lift up other folks in your creative community and do everything you expect the people supporting you to do.
Now I’m four days from the end of my own Kickstarter and I’m a little melancholy, perhaps because I’ll have to start seriously kicking ass once it’s done. I’m almost mourning that I won’t get to play with my spreadsheet every day — the coming work is much harder and scarier. My spreadsheet been a comforting little digital friend.
Patrick Race is the smartest and best, and he forced me to start this spreadsheet many months ago. He made me run lots of scenarios, and he hit on the importance of the the critical Fulfillment Costs as Percentage of Total Funding ratio. I evolved the spreadsheet lots from there, but he started it, and I’m glad I have him to make me do a budget when I just want to Rhyme All The Things.
If you read this because you’re curious, thanks! If you read because you plan to crowdfund, good luck, and be thorough. Do your homework, and you’ll feel good throughout the process.
It’s an amazing time we live in, that thousands of impossible imaginary projects can be attempted and actualized through tiny communities everywhere. What a glorious day this is. I love it.
All my best,
Marian’s first Kickstarter: http://www.kickstarter.com/projects/mariancall/marian-call-european-adventure-quest
Marian’s current (at this writing) Kickstarter: https://www.kickstarter.com/projects/mariancall/marian-call-makes-a-new-album-standing-stones
*Various disclaimers: 1) I’m sure I’ll have cause to update this a few times and it’s probably not perfect — just a jumping off point for your own use. 2) These numbers aren’t quite real, so you can’t use them to reverse engineer my budget, sorry. Use them to make your own budget instead! 3) If you have loads of corrections and Actuallys, that’s nice, but I don’t have time to individually answer or argue all the details — and I don’t really care to. Instead, propose your own best crowdfunding practices in your own webspace! I gots to focus on my campaign. To the work.