Promotion Thresholds, Revenue Sharing, and Delivery Risk in Reward-Based Crowdfunding

Abstract

This paper investigates two marketing strategies a reward-based crowdfunding platform employs to align its preferences with an entrepreneur’s choice of pledge and target levels. These are (a) how to promote campaigns to potential backers, and (b) how to share campaign revenues with the entrepreneur. Kickstarter, for instance, promotes a set of campaigns by compiling a list of “recommended” projects. This research shows that the platform’s choice of the promotion rule may expose entrepreneurs to the risk of not generating sufficient funds to start production, which can damage their and the platform’s reputation. When the platform’s reputational risk is not very high, it reduces the risk of non-delivery by increasing the revenue share of the entrepreneur. The platform’s strategies are likely to ensure production when backers derive warm glow from pledging, when the entrepreneur’s development cost is low, or when the entrepreneur has minimal reputational cost if production fails. However, low reputational costs motivate the entrepreneur to lower the target, thus increasing the likelihood of insufficient funds to start production. We propose strategies the platform can use, including customizing the revenue share based on the campaign characteristics, to rectify such misalignments.