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How to create a realistic budget for your crowdfunding campaign

How to create a realistic budget for your crowdfunding campaign

Best Practices Update #3 (February 2014)

How to create a realistic budget for your crowdfunding campaign

Disclaimer: The content included in this article and in the Crowdfunding Budget Template is intended as a general guide only and does not constitute official financial or legal advice of any kind.

One of the most important aspects of running a successful crowdfunding campaign is setting the right funding goal.

While it is important to set a funding goal that reflects your project’s financial needs accurately in order to ensure you gain the confidence of potential donors, it is also important to consider any expenses you may incur during the crowdfunding process and account for them when setting a funding goal. A good rule of thumb is to plan on setting a funding goal that equals 33% more than the amount you actually need to complete your project.

However, the best way to make sure you end up with the funds you need at the end of the process is to create a crowdfunding budget that outlines the core expenses related to running your crowdfunding campaign along with the amount you actually need to cover your project costs.

Below is a summary of the key items to consider when building your crowdfunding budget. Use this guide along with our budget template to set a realistic funding goal that will allow you to fund your project and cover your campaign costs.

Here are the things you should think about when calculating your funding goal:

Actual project costs

The first thing you need to do is to determine how much money you need to complete your project. This amount will vary greatly depending on what stage of completion your project is already at and what type of project you are completing. The number you come up with here is the most important one. Your ultimate objective is to end up with that amount left at the end of the crowdfunding process so that you can actually get your project completed. It is important to do your research and make sure you have a good idea of what it will cost you to complete your project before you set a funding goal. Once you know how much money you actually need, you will have to add enough to that amount to cover all the expenses associated with actually running a crowdfunding campaign.

Typical project costs include (but are not limited to) expenses such as:

  • Rights acquisition (if applicable);

  • Scriptwriting and/or storyboarding;

  • Labour expenses (don’t forget to account for all stages of project development right through to distribution);

  • Sales and distribution;

  • Marketing and promotion (of product);

  • Office and/or studio space;

  • Equipment and materials;

  • Administrative and other overhead expenses.

Fulfillment

If Haunts’ experience taught us anything, it’s that failing to properly estimate the cost of fulfillment for your crowdfunding incentives can mean that your successful campaign turns out to be less profitable than expected—or even leave you at a net loss.

Here are a few things to consider when calculating the cost of fulfillment:

  • Figure out exactly how much it will cost to produce that awesome merchandise or host that cool launch party before you promise them to your contributors.

  • Be cautious when choosing what incentives to offer. Non-material incentives (e.g. digital or experiential) are less expensive to produce and allow you to save on shipping costs, greatly reducing the impact on your budget. Otherwise, go for low-cost merchandise that is easy to ship at a low cost.

  • Estimate how many incentive packages at each contribution level you will need to fulfill. And remember that it’s best to over-estimate than under-estimate, as long as you remain realistic.

You are likely to receive a much greater number of contributions at lower levels (current popular wisdom suggests that the most popular contribution level is $25) so make sure those incentives are the least costly to fulfill. You may also want to limit the number of incentive packages you make available at higher contribution levels to keep your costs down.

  • Don’t forget about shipping costs. If your campaign will be open to contributors from around the world, make sure that international shipping costs won’t outweigh the contributions you receive. Consider limiting the incentives available to international contributors to non-material incentives or charging a small shipping fee if international contributors would like to receive any material incentives you have on offer. Either way, it is important to consider both domestic and international shipping when estimating your shipping costs.

  • You should also factor in the cost of the time and effort associated with the fulfillment process once the campaign closes.

Tips & Tricks

Play it safe be making estimates using a worst-case-scenario approach.
Don’t forget to include the cost of packaging when estimating shipping costs.

If possible, try to include an additional shipping fee for contributors located internationally to help cover expensive international shipping costs.
Indiegogo published some stats outlining the most popular contribution levels among crowdfunding project supporters on the platform. The blog post also includes a breakdown on which contribution levels actually yielded the greatest value for the project owners. These stats can help you estimate how many contributors to expect at each level.

Check out Lucas McNelly’s estimates of contribution level distribution based on data collected from 717 campaigns.

* Note that there is a slight calculation error of the average contribution amount in McNelly’s model so make sure to double check the calculations when using his model.

Marketing

Possibly the largest expense associated with your crowdfunding process will be the cost of marketing and promoting your campaign. It also happens that this will likely be the hardest set of costs to estimate. Here are some items you should count in your marketing cost estimates:

  • Promotional materials (e.g. a campaign video, press releases, sample artwork and gameplay demos for games, etc.). Good quality promotional materials are an essential ingredient for a successful campaign. This is one area where cutting costs (and cutting corners) will not benefit you or your campaign so make sure you budget for it.

  • One of the most unanticipated and arguably mst costly marketing expenses is the cost of managing an ongoing engagement with your support community before, during and after your campaign. You may need to hire a new resource to manage your community engagement or you may opt to take on the opportunity cost of shifting yours and other resources’ time away from working on the actual project in order to manage the community. Either way, you will need to estimate how much human resource time it will take, and the cost (in dollars) of that time, in order to build those costs into your funding goal.  

  • You may also want to budget for other marketing costs such as the human resource costs associated with seeking coverage through more traditional media channels such as online and print publications, and television and radio interviews.

Tips & Tricks

Managing an online community can be a full-time job, especially if you have a large following of supporters who want to engage with you regularly. Make sure you set aside enough resources to cover your campaign promotion needs.

Rockethub’s FAQ page has a useful chart for estimating how much time you can expect to spend on marketing and communications, based on the size of your campaign goal.

Remember to budget for time spent on marketing and promoting your campaign well before it launches as well as time spent on ongoing engagement with your supporters after the campaign closes.

Fees

It's important to factor in the cost of the various fees associated with running your campaign. Given that your campaign could be subject to fees that amount to as much as 10% or more of the funds you raise, you need to set a funding goal that allows you to cover the cost of fees and still leaves you with the necessary funds for your project. The typical fees you can expect to pay are:

  1. Platform fees. Platform fees typically fall between 2%-5% of the funds raised, although they can be as high as 10% in some cases. Some platforms will charge different rates depending on whether or not your campaign successfully reaches its funding goal, charging more if the campaign falls short. As always, it’s best to use the worst-case scenario and calculate the estimated platform fees using the highest possible rate.

  2. Payment processing fees. Beware of additional payment processing fees when calculating your campaign costs. In many cases the funds you raise could be subject to additional fees on top of those charged by your platform of choice. Some platforms charge an additional fee for credit card processing whereas in other cases the platform’s payment partner (e.g. Amazon payments, PayPal, etc.) charges an additional processing fee. These fees generally amount to 2%-4% of the contribution payments processed. And in the vast majority of cases, the campaign owner is the one responsible for paying the processing fees, not the contributor.

Income tax

Following recent comments from the Canada Revenue Agency (CRA) confirming that dollars raised via donation or reward based crowdfunding are considered business income and are subject to applicable income tax, it is important to factor in the taxes you will have to pay when you set your funding goal. You will want to set a goal that allows you to cover this expense. Here’s a breakdown of the taxes you will need to consider:

  1. Federal business income taxes. In Canada the standard Federal business income tax rate is 15%, however there is a small business deduction that reduces the rate to only 11% if your business is eligible.

  2. Provincial business income taxes. Most provinces and territories in Canada collect additional business income taxes. Determine what the rate (if any) is in your province or territory and add that to the Federal amount to determine the total amount of the taxes you will owe on the funds you raise.

Tips & Tricks

Remember ro use the tax rate that applies to you, based on your province and the size of your business. You can find the necessary information to identify the rates that apply to you on CRA's website.

Contingencies

As with anything, unexpected expenses are bound to arise during your crowdfunding process. It’s a good idea to include a small contingency amount in your budget, just in case.  A good rule of thumb for determining the size of your contingency fund is to calculate it at 10%-30% of your campaign costs.

The more confident you feel in your estimates and the more you use a worst-case scenario approach when estimating all your campaign expenses the smaller you can make your contingency fund. But again, it’s always best to err on the side of slightly over-budgeting as crowdfunding campaigns can move in fairly unpredictable directions that can lead to unexpected costs.

Remember, your ultimate objective is to set a realistic funding goal that represents the true costs of your project. However, your funding goal also needs to account for any costs and deductions associated with the campaign process so that the net amount you are left with after all expenses and deductions is enough to cover your actual project costs and allow it to make it to its completion.