This article is sponsored by Fulfillrite: Indiegogo and crowdfunding reward order fulfillment services. USA & International shipping services.
Estimating costs for your Indiegogo project begins when you make the decision to either use Indiegogo’s flexible or fixed crowdfunding campaign. If you’re having difficulty deciding, I’ve also put together a guide that goes into more detail comparing Indiegogo’s fixed vs. flexible funding model.
Standard Indiegogo Fundraising Fees
Indiegogo Fees for Non-Profits
Implications on Rewards
One important difference to note between flexible and fixed Indiegogo campaigns is that if you choose to run a flexible crowdfunding campaign and you do not meet your goal, then you will receive any funds raised and you will need to produce any promised rewards.
For Example
Let’s say you were aiming to raise $40,000 to produce a new kind of watch. At the $50 reward tier, a backer could choose to receive the watch as their perk. Unfortunately, you only managed to raise $5,000 from the campaign.
Since you elected to do a flexible crowdfunding campaign, you would get to keep that $5,000 and you would be charged a total fee of 12%. With the $4,400 you raised, you now must produce the rewards you promised your backers.
This could become tricky really fast if your manufacturing is demanding a minimum quantity of orders and the $4,400 raised does not allow you to meet that number. You’re going to have a bunch of people waiting for you to deliver on a watch that you don’t have the capacity to produce from the crowdfunding campaign.
At this point, you may need to personally finance the production, get a loan, or run another campaign. Otherwise, you will have a bunch of angry backers who will tarnish your brand and who may even file lawsuits.
You could always opt to refund backers that pledged at that $50 tier (and up), but because you already were charged the 12% fee, this is kind of like taking two steps forward and one step back.
The best course of action is to plan to deliver all rewards if you are running a flexible funding campaign, even if you don’t meet your goal.
Variable vs. Fixed Costs
Your Indiegogo project may not result in an end product, but it’s likely that some of your reward tiers will include physical perks that need to be shipped to backers around the world.
The goal with all cost estimation is to separate fixed costs from variable costs and to eliminate as much uncertainty as possible going forward.
I consider fixed costs to be those that will not change throughout the duration of the campaign and after the campaign. I would lump pre-campaign activities into the fixed category, because you know the definite costs and can factor those into your fundraising goal and the price tags for your rewards.
Examples of fixed costs
– Video production.
– Graphic design or artwork used in the campaign.
– Website creation (domain name, hosting, theme).
– Advertising. It can be tempting to increase advertising if the pledges are coming in quickly, but if you priced your rewards so that 5% of the price tag would be devoted to advertising, then don’t exceed this margin. Don’t forget that you will still need to produce the rewards claimed by new backers.
I consider variable costs to be those that may change throughout the duration of the campaign or when the campaign is finished.
Examples of variable costs
– Manufacturing. It may seem like getting a quote from a manufacturer ensures that all manufacturing related costs are fixed, but unfortunately, this is not the case. Not only may the manufacturer’s pricing structure fall through, but the parts you get may be defective or not up to par. Be safe and get multiple quotes from different manufacturers and research the background and history of each provider.
– Shipping. Depending on where your backers are located around the world, shipping prices may vary.
– Labor. If you attract more backers than anticipated, you may need help packaging and shipping out rewards. The more you raise, likely the longer it will take. You may have planned to fulfill the rewards yourself initially, but if your orders went through the roof, you may need assistance.
It’s important to keep the differences between fixed and variable costs in mind because sometimes hidden costs or changes in pricing can sneak up on you, making reward production require more funds than you initially anticipated. I’ve seen campaigns need to go into their own savings to produce all of their rewards, which is the last thing you want to have to do.
Creating a Margin of Safety for Variable Costs
In my post, “How to make money on Kickstarter,” I showed that the vast majority of all-or-nothing crowdfunding campaigns don’t make huge profits (8-10%).
One simple mistake in estimating costs for your Indiegogo can easily chew up this margin. Therefore, I usually recommend that campaigners budget in a 8-10% cushion for their campaign to counteract possible variable cost changes.
If everything goes as planned, then there will be a bit of profit from the campaign. If not, then you won’t need to dig into your own savings account to finance reward production.
Taxes
This is probably the most overlooked part of running not just an Indiegogo, but any type of crowdfunding campaign. It’s also one of the hardest issues to pin down with a straight answer because depending on where you are, your company’s structure, and where your backers are, the tax laws you must comply with will vary.
“You will comply with all applicable laws and regulations in your use of Contributions and delivery of Perks. You are responsible for collecting and remitting any taxes on Contributions, and any taxes due in connection with your Perks.” – Indiegogo Terms of Use. “Most Indiegogo donations are not tax-deductible, unless they’re made to a 501c3 nonprofit group.”
I’d recommend checking out the Kickstarter Tax Guide and considering these implications for your Indiegogo Campaign (both are similar types of fundraising vehicles).
“In general, in the US, funds raised on Kickstarter are considered income. A creator can offset the income from their Kickstarter project with deductible expenses that are related to the project and accounted for in the same tax year. Beyond deductions, a creator may be able to classify certain funds raised on Kickstarter as a nontaxable gift, and not income. Sales tax may also be applicable in certain cases depending on the local rules. In general, sales tax applies only if the creator has sufficient connection to the location of the backer.”
Unfortunately, since a an Indiegogo project creator can live in may areas around the world, there is no cookie-cutter answer, other than to do your research and consult a tax adviser. For example, in this Forbes article, the author cited how “In the UK, if your crowdfunding revenue plus any other sales income exceeds £77,000, you’ll need to register for and pay VAT. That means charging VAT on everything you sell, something you can’t retroactively impose on your rewards, and claiming back the VAT on the supplies you buy.”
To get a better idea of the range of responses regarding taxes and crowdfunding, check out this article below. It has some great information and case studies.
Conclusion
I urge you to share the process you’ve used to estimate costs for your Indiegogo campaign and how you went about pricing reward tiers in a comment below. I also recommend checking out other common mistakes when calculating reward fulfillment.
