Reward-based crowdfunding is when a project creator offers rewards or incentives (not equity) in return for pledges from backers. This is a common approach for organizations that want to fund a specific project or element and are willing to offer merchandise or promotional goods in exchange for pledges when their goal is fully funded.
What are the limitations?
Most reward-based crowdfunding operates on a fully-funded approach. This means that if your project is not fully funded within your campaign deadline, you do not receive any funds and your backers have their pledges returned. If this happens, you do not have to pay any fees to the platform for the unsuccessful campaign.
Some well known platforms that support reward-based crowdfunding are Kickstarter and IndieGogo.
What is a fully-funded approach?
If a campaign has a fully-funded approach, all contributions are treated as pledges until the project reaches its goal. That means no money is charged to campaign contributors until the project is completely funded.
Did you know? Offering digital incentives such as desktop wallpapers, PDF certificates, or limited-term online memberships as part of a tiered reward structure is a great way to offer incentives in exchange for pledges and not incur extra shipping costs.
Risks & Benefits of Reward-Based Crowdfunding Platforms
Reward-based crowdfunding is very popular due to the tiered reward structure utilized by most campaigns. This means that for every pledge within a certain range, your contributors can be rewarded with digital or physical incentives once the project is fully funded. If using a reward-based structure, it is very important to budget properly and honor your promises to your contributors to distribute rewards in a timely manner.
- Backers get excited about the promise of reward incentives for their contributions.
- Launching a campaign can move at a faster pace.
- It is free to launch your campaign until you reach your funding goal– there are no upfront costs for launching your campaign.
- If you can gain momentum, projects that raise at least 25% of their funding goal are more likely to fully reach their funding goal.
- Campaigns launched on Kickstarter or Indiegogo receive a lot of free attention on social media and news networks.
- A limited campaign length means you know whether or not your attempt was a success very quickly (within 90 days).
- Creators keep 100% ownership of their work when representing it on Kickstarter.
- Funds raised through platforms like Kickstarter count as ‘income’ and are taxed accordingly. Kickstarter typically issues a 1099-K. If your expense deductions take place in a different fiscal year than your Kickstarter income, it may complicate your tax situation.
- You may have to wait until your project is fully funded to see any money from your contributor’s pledged funds. If you fail to communicate with your contributors, they may even choose to withdraw their pledges.
- Most platforms take a fee (anywhere from 3-5% of your raised funds) once your project is fully funded. There is also usually a payment processor fee assessed on any contributions made to your project. Taxes and fees can cut into your margin if you do not budget accordingly.
- If you fail to distribute promised rewards or experience lengthy delays, backers may lose trust in your project.