Crowdfunding is not only a source of financing for start-up companies, it’s also a potentially powerful tool for big companies looking for customer input during product development because customers willing to put money into developing a product are going to be more engaged than people in a focus group. Companies that use crowdfunding in this way should pay particular attention to the input of atypical customers.
For over a decade, start-ups have used reward crowdfunding to raise billions of dollars of early-stage financing. These companies pre-sell products to consumers while the products are still under development, and customers receive the product as a “reward” for their support when development is finished. Now established companies such as P&G, Coca-Cola, and Lego are starting to get in on the game. Only they don’t come for the money, but for crowdfunding’s hidden value: the voice of the customer.
Crowdfunding is more than just a way to raise money. It’s a promising alternative to more traditional ways of getting customer feedback (think focus groups) into product development. The willingness of crowdfunding customers to engage, as well as the depth and breadth of their contributions, is unrivaled by other forms of customer interaction. Over the years, we have seen crowdfunding customers offering not only concrete product ideas but even connecting companies to potential suppliers and retailers.
The reason for this is simple: Customers are putting their money where their mouths are, and that means their interests are naturally more aligned with those of the company they’re backing. A key issue in traditional market research is the different interests of innovating companies and potential customers. Companies want a product that sells well at a margin, while customers with no stake in the company want the best possible product for the lowest price. Crowdfunding customers, however, are interested in the economic sustainability of the product — because otherwise they likely won’t get what they paid for. As one crowdfunding executive summarized it: “There’s a country mile between somebody saying they will buy it, and actually pulling out their wallet and making a purchase.”
There are risks, of course. For crowdfunding customers, the experience is as much about the final product as it is about their participation in its development. If companies don’t involve — or worse, ignore — their customers, the relationship with the crowd can quickly sour even if the product itself is liked. When GE used crowdfunding for a new type of ice maker, customers complained about the lack of engagement. As a story in the New York Times summarized, “The backers did not just want a device to eventually arrive in their mailboxes. They wanted to feel involved in and informed about its development.”
To better understand when reward crowdfunding works and how companies can take advantage of it, we analyzed more than 20,000 campaigns on the popular platform Kickstarter.com. Two key recommendations emerge from our research.
Show Yourself Open to Co-Creation
Crowdfunding customers — or “backers” — are eager to contribute their time and knowledge to crowdfunding projects. The only thing they expect in return is an organization’s genuine openness to their ideas. In our research, we show that interacting with backers and working with them on improving a product can significantly increase pre-sales already during the crowdfunding campaign by on average 65%.
The Australian headphone maker Nura provides a great example of this. The company started out with a radical new approach to headphones. Using “otoacoustic emissions” — the echo our ears produce in response to incoming sound — Nura’s headphones automatically adapt to people’s idiosyncratic hearing abilities. For instance, some people hear high frequencies better while others are better at lower frequencies. Although the technology proved promising in early tests, developing a new headset was an entirely different game. Nura decided to seek out crowdfunding, not just to finance initial production batches, but to gauge what customers thought.
Nura was deluged with useful feedback on their early prototype. For example, the headphones initially came with a wired USB connection that could deliver the best possible sound. What Nura’s engineers hadn’t realized was that Bluetooth and a traditional 3.5mm audio jack were still important for many users. As the team behind Nura later acknowledged: “You [the backers] have provided us with extremely valuable information that will help us deliver you the product you want, not the product we originally thought you would want.”
Recognize the Value of Distant Information
Crowdfunding gives organizations an outside perspective on their new product. This perspective is most useful when it is different, in other words distant, from the organization’s existing knowledge.
Consider a game developer, one of whose backers is a frequent theater goer. Her feedback, unlike that of the other gamers, may focus more on the game’s story than on technical aspects. In the end, the feedback from this backer — focus on a well-written story with interesting characters — makes the product appeal to a broader range of customers. Our analyses confirm this: Customers who had previously funded products in other market segments provided feedback that is 60% more valuable in terms pre-sales than that of customers who had previously invested in the same category.
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Reward crowdfunding aligns companies and customers in a way we have never seen before. It not only serves to match the supply and demand of capital it also enables interactions that increase the value being created – as long as companies are genuinely open to those interactions and willing to look beyond the publicity.