Thoughts about Kickstarter

People often ask me for advice when they’re considering using Kickstarter. I’m happy to oblige. I don’t think any of this information is “secret”. The reason someone should pay me real money to consult on their Kickstarter is so that I can provide personalized help that looks at their particular product, cost structure and marketing approach. With that in mind, here’s some general advice, followed by an example that digs into some of the math. It’s derived from correspondence I had with someone considering a book project, so that informs the general thrust of it.

My Advice

Should you do it? Don’t launch a Kickstarter until you are confident that you have engaged with at least some kind of network who will help you get the word out. It may be “free” to run a failed Kickstarter, but only if you don’t count the time, and indeed money, you have to put into promoting it – a decent video can make or break a campaign – and the favors you’ll be calling in, asking everyone you know to make posts on your behalf around the internet. That’s your social capital, don’t waste it!

Production Costs: Don’t guess. Find out how much it will cost to produce your product. If you’re making a book, printers will give you estimates, but you need to work out your desired format – they can’t do that for you. Decide what page size, page count, and range of quantities works for your project. For example, 1000 copies is the barest minimum for offset printing, and that’s going to look very expensive per unit, since most of the cost is press set-up. The unit cost will look much better with each 1000 additional copies you order. But, if you only need 1000 copies, don’t be fooled by that lower “unit cost”. You’re paying the for the press-run, up front, and you will only recoup costs when you actually sell the books! For small print runs, I advise looking into print-on-demand solutions. If you are only selling directly to retail customers, those can be very cost-effective.

Pricing: If you intend to sell your item to stores and distributors, you will have to do so at a large discount, plus you will be expected to absorb the cost of shipping. You’ll need to set your retail price high enough that you can make a profit on all of those sales.

In the comic and game industries:

  • Retail stores pay ~50% of the cover price (and you pay the shipping).
  • Distributors pay ~40% of the cover price (and you pay the shipping). Diamond Comics in particular require goods to only be sent via certain types of carrier, which are not the cheapest available.
  • In these industries, the rule of thumb is that your production costs must stay below 20% of your retail price to be viable, and 10%-15% is much safer.
Setting Your Goal: When it comes time to set the goal for your campaign, the math is far from simple. You need to raise enough that you still have something left over after:

~10% is kept by Kickstarter & Amazon payments
You’ve paid your production bills in full, including freight
You’ve paid for any premiums (stickers, t-shirts, etc.)
You’ve packed up and mailed all of the backer rewards
You’ve paid the income tax on the profit you made
You’ve paid any sales tax that your locality requires

Premiums:

  • Don’t underestimate the cost of producing them, especially in small quantities
  • Don’t underestimate the time needed to produce them, especially in large quantities
  • Don’t promise anything you don’t have a thought-out production plan for
  • If you are offering anything hand-crafted, ONLY include it in limited-quantity reward levels, so you don’t overcommit yourself
  • Don’t underestimate possible difficulties in shipping, handling and even customs, if you ship overseas.
  • There are much lower costs associated with printed matter vs. just about anything else
  • Don’t offer anything breakable, unless you’ve got a really big safety margin (Coffee mugs, I’m looking at you).

Stretch Goals: Be wary of what I call “campaign creep”. During a successful crowdfunding campaign, supporters will clamor for stretch goals. It’s wise to have a few additional pledge levels or minor products or projects planned, so that they can be announced to keep enthusiasm up. But often requests for “stretch goals” become requests for additional premiums to be provided to backers at no additional cost to them. In the heat of the moment, these requests may seem reasonable. While it’s true that -generally speaking- profit margin per customer will increase with scale, that margin can easily be wiped out, or reversed, by adding even seemingly simple new rewards. It is far too easy to underestimate the additional time, work, storage space and handling charges required for each new thing. It’s a slippery slope that can lead to “Death by Kickstarter”.

In summary: I don’t advise people to go onto Kickstarter until they have a reasonable expectation of success. If you have a sufficient number of loyal, excited followers, who express an interest in having your product, and their direct purchases would come close to covering the cost of your desired production run, then you’ve got a good launchpad. You have a good shot at expanding your audience, and funding a profitable product.

So What Does This Wind Up Looking Like?

I’ve written up an example Kickstarter, showing the cash and profit results for someone planning a hypothetical $10,000 print run of small format art books. It’s all round numbers, for the sake of the example. Research the exact costs for your particular situation!

Doing the Math

An artist wishes to print 2000 books, which can be sourced for $5 a piece. They plan to sell some of them into retail channels afterwards. To make that feasible, they have set their retail price at $30. Basic cost research:

$10,000 to the printer (plus $500 freight for 50 cases of 40 books – one partial pallet – delivered to the artist’s home)
$5 minimum shipping for each domestic backer (USPS printed matter only, mailed in padded envelopes).

Overseas backers would cost much more, and will be excluded from this example. In practice, the up-charge for international shipping should be calculated to cover something close to the worst-case scenario, since there is no way of predicting the mix of countries backers will live in.

Note that these costs do not include paying anyone to label, weigh, take packages to the post office, etc. We’re assuming that the quantity will be low enough for the artist to do this themselves. In assessing this, the artist should take all of that time into consideration when deciding whether the project is worthwhile. Just because something does not require cash does not make it free!

Let’s assume the artist asks for a minimum of $14,000 and makes it by a small margin, getting these quantities of backers:

20 people throw in $5, for no reward
50 people throw in $15 for a small premium (e.g. a pack of art postcards)
300 people throw in $30, for the book at “retail” (but shipping is included)
100 people throw in $50, for a book plus two premiums

The raw pledges come to $14,850 which goes to the following places:
KS and Amazon keep $1485
Printing comes to $10,500
Postage and supplies comes to $2,350

Premiums cost around $150 (postcards, cheap)

$14,850 – $14,485 = $365 cash on hand (assuming the artist had some other way to pay their bills). For tax purposes, they are showing a profit of $8365. They’ve sold 400 books, so the Cost of Goods on the book sales came to $2000. The other $8000 (1600 books) becomes inventory – an asset. The cost of those goods is only recorded as they are sold (or given away in promotions, or – heaven forbid – thrown out as unsaleable).

Now let’s look at what happens if we double the the numbers of backers across the board. In that scenario, the total pledges come to $29,700

KS and Amazon keep $2970
Printing still only comes to $10,500
Postage and supplies comes to $4700
Premiums cost around $200 (postcards – still cheap!)

In this case, the artist will have $11,330 cash on hand afterwards, and show a profit for tax purposes of $17,330. Afterwards, they hold an inventory of 1200 books, worth $6000 as an asset.

For this artist, it looks like a $10,000 book print run translates into the need for to raise more than $20,000 in raw Kickstarter support, if they want to have any compensation for their own work, and to have a decent amount of cash on hand when the dust clears. They should set their minimum requirement on that basis, unless they have other sources of funds in starting up their publishing business. And they will need to do one other set of numbers, to check for safety: what happens if their book is a runaway hit? The unit cost of the books will be reduced, but the moment the artist doesn’t have room in their home to receive and process the mailing, they will encounter both storage and fulfillment costs. Also, they may be tempted to invest more of the excess cash into inventory (i.e. print more books, because it is so “popular”), but if they do not already have the structure in place to handle selling to stores and distribution once the kickstarter is done, that might not be wise. The extra books may just languish.

Please feel free to contact me, and ask more questions!