Reward crowdfunding: what it is and what it is for

Reward crowdfunding is an online fundraising based on the reward mechanism: in exchange for paying an amount to support a project, a reward is offered, which usually coincides with the product for which the company is raising resources.

It's a model very different from lending crowdfunding and equity crowdfunding, as it doesn't involve any capital remuneration. Therefore, we're not talking about an "investment" from supporters in a reward crowdfunding campaign.

Those who participate in such a campaign do so because they are interested in the proposed product and want to contribute to its realization, obtaining the corresponding reward, which has the character of privilege.

The first crowdfunding platforms that emerged at the dawn of this phenomenon were precisely based on the reward model: Indiegogo and Kickstarter in the United States, and Produzioni dal Basso in Italy are portals where funds are gathered to create objects, software, artistic works, and cultural productions in exchange for various rewards.

We exclusively talk about "products" and not "services" because, although there is no specific prohibition, reward crowdfunding is by its nature less suitable for promoting and selling services, while it is perfect for products. We'll understand why by delving deeper into the concept of "reward."

What is a "reward"

The key element of crowdfunding, it is known, is the involvement of participants in a campaign, but in reward crowdfunding this concept is to be understood even more deeply.

It is not enough, in fact, to perfectly identify the target audience for one's product and make them aware of the existence of that product and the need it satisfies. Anyone might think of simply waiting for the market release to buy it, so as to wait for some feedback from others, verify that it is not a washout, that it will materialize and be reliable.

To convince someone to finance a product even before it is realized, it is necessary not only to convey the quality and importance of the product but above all to provide a good reason to expose oneself before everyone else: the reward.

However, the reward cannot simply be a discount on the product, as that is something commonplace and repeatable over time (and it will repeat!). It must be something exclusive, personal, unique, reserved for a few, capable of establishing a direct relationship between the supporter and the company—something that can truly stimulate engagement.

Typically, those who participate in a reward crowdfunding campaign, if successful, receive the product they helped to create in advance of market launch and at a lower price than when it is sold to the public. But the reward does not end there and can be declined in a thousand more or less creative ways:

• customized product;
• gadgets and accessories related to the product;
• Product-related experience;
• Direct involvement in the realization of the product;
• honorable mention;
• ...

These are just a few examples, because the nature of the reward is closely linked to the specificity of the product to be funded and personal inventiveness. Some very simple practical applications are mentioning the supporters' name in the product itself or in the media where the product is communicated, engraving the name on the product, using the name for a character (e.g., in the case of a video game), customizing the product according to one's taste (e.g., in colors), visiting the production site, participating in demonstrations of product use, and we could go on for pages and pages.

The reward is proportionate to the size of the amount invested and may also vary over the course of the campaign to incentivize people to invest first: first-hour supporters may receive a "premium" reward over those who procrastinate.

It is therefore understandable why reward crowdfunding is used almost exclusively to raise funding for product development (even in a broad sense, e.g., film production): for services, it is much more difficult to "package" a reward that goes beyond mere discounting.

Advantages of reward crowdfunding

Engaging participants in a crowdfunding campaign is not done only upstream, with marketing aimed at bringing them to the transaction, nor only downstream, with rewards. Backers can make another valuable contribution besides financial: they can "do consulting," from the customer's point of view.

Perhaps even more so than funding, the main advantage of reward crowdfunding is actually the ability to test the market while raising capital: in one fell swoop, you raise the financial resources to start building a product and test whether there is actually demand for that product before the actual market launch.

Not only that: by directly engaging with the financiers, who are also customers, you can uncover any weaknesses in the product and make corrections before the official launch. Conversely, the strengths that emerge from this interaction can be leveraged in public communication.

The reward crowdfunding campaign thus becomes a validation of a prototype, a test for expansion into another market, a part of the launch marketing of a new product. This reduces the costs and risks involved in producing something new, coming to market with a product that the public has already liked.

Moreover, the economic transactions take place on the crowdfunding platform hosting the campaign, so a company that does not yet own an e-commerce does not even have to incur the costs of building it before it knows whether its business will have a future.

Beware, however: the responsibility for fulfilling the promises made to supporters rests entirely with the proposing company. The platform does not guarantee users that the money paid will actually be used to realize the promised product: underlying this is a relationship of trust between the company and supporters, which it would be disastrous to disregard.

Reward crowdfunding in Italy

Since Productions from Below, however, many other platforms have developed that allow reward crowdfunding campaigns and propose two main ways of operation:

Since Productions from Below, however, many other platforms have developed that allow reward crowdfunding campaigns and propose two main ways of operation:

• all or nothing, whereby if the minimum financial goal is not met, the society receives nothing of what is raised and supporters are refunded;
• keep it all, whereby even if the minimum goal is not met, the society receives what is paid during the campaign, regardless of the amount.

The second model makes sense for low-cost, low-risk projects for which a company knows it can proceed even with little funding.

The fact that reward crowdfunding is little practiced in Italy can be an opportunity for product startups to seize, because it is a real competitive advantage over other companies in the industry. Learning to use this tool not occasionally, but as part of business processes, is the real added value.

Acquiring this mindset and the related skills is also very useful for integrating the marketing processes underlying other crowdfunding methods: the reward mechanism is essential for successfully conducting equity crowdfunding campaigns, for example.

Per approfondire le potenzialità del reward crowdfunding e le altre modalità di raccolta di capitale, entra nel gruppo Facebook di Turbo Crowd, prima agenzia marketing per il crowdfunding in Italia.

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