New product launches
You have an idea that you hope people will like and pay money for. Then you develop it and research the market. Next, production of enough items to fuel your first sales.
And this is how it has been done up until now. Hoping that your idea works, then doing research to see whether you have a feasible chance selling enough at the right price, then investing in a production facility and stock, and then advertising and selling it.
All very high risk, and the chances are that some element of it will be wrong. To quote Mike Tyson, “Everyone has a plan until they get punched in the face”. And you get at least one punch, if you’re very lucky. The chances are it will be more than one assumption that needs quite a bit of tweaking, and so there will costs and delay before you get it to something that enough people buy for you to make a profit.
And to do this you would have needed some form of financing, either from past profits or your own resources, or third parties which have usually been banks or investors.
New forms of finance
With the rise of digital technology, we can now use crowdfunding as a funding source. It’s very easy to use one of the platforms or to set up your own crowdfunding site. It can be a lot cheaper to raise funds as you don’t have to pay fees or interest to a bank, but you have to give away some shares. But if you are funding from a crowd, you’re not really giving away too much in the way of control. Nobody owns enough shares to really be able to influence what you want to do.
And if everything goes wrong, you don’t have to put up a guarantee for your house or pay the money back. So this gets around one of the real risk issues in launching something new.
But it also has huge operational and marketing benefits.
Marketing and operational benefits
You can do as much market research as possible, but you don’t really know whether anybody wants your stuff until they part with money for it. And by that point you have poured resources into developing what you think they want. Crowdfunding gives you the opportunity to use the funding platform as a marketing tool, very cheaply, and allows you to tweak your new product by responding quickly to the feedback you receive so that you can produce a product which you can confidently know that people will want.
From a marketing perspective this saves you a huge amount of time, effort, resource and risk.
It also has operational benefits. You will know from your crowdfunding platform how many you have to make initially, and your crowdfunders would have given you the money to make them. So your stocking cost is virtually nil, and your costs of production are also reduced because you are making something that you know someone will want, in the right quantities they have requested.
You have fans!
Your crowdfunders will want you to succeed as they have invested in you emotionally as well. So they are likely to spread the word throughout their social media and physical communities, who are likely to be people like them and therefore reasonable prospects for your product sales. In effect you have an un-paid salesforce.
We are regularly asked by clients whether crowdfunding is a good solution for financing a new product or start-up, and we make sure that all the other benefits are well understood so that the risks of the start-up are much reduced and the time to profit is shortened. We’ve had some good results this way, and just as importantly, clients have got feedback on what won’t work so have thought again. Projects which won’t work are best binned quickly – cheaply – so that resource are still available for something that might. Fail fast – here’s the first blog.