How Crowdfunding Helps Reduce Risk

When creating a new product, one of the most difficult things to gauge is market interest. Creating a prototype can help, but often is requires investing in manufacturing to produce a short run of your product, which undercuts economies of scale if the prototype is a success or results in a financial loss if it’s not. In this context, crowdfunding helps companies reduce uncertainty.

A crowdfunding campaign helps companies to cover their initial product development costs, and can serve as a valuable barometer of potential customer interest. In many cases, if a firm doesn’t reach its crowdfunding goal, it doesn’t have to commit to producing the item, reducing wasted investment.

The approach does have several shortcomings, however. A well-targeted crowdfunding campaign may meet its goal but exhaust the customer base for the product, for example, making the creator too hopeful about a product’s appeal to a wider audience. On the other hand, a poorly marketed campaign may fail not because the audience isn’t there, but because the right people didn’t hear about the product.

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