People talk about the big money crowdfunding smashes like Exploding Kittens (which recently raked in an astonishing 8.8 million). What people don’t often talk about is the dark side of success: when a project is successful but the creator still ends up in the red. There have been many project creators who ended up losing money on each reward shipped, and if they have to ship too many of those rewards then they end up in bankruptcy. It’s happened before, and it will happen again. Don’t let it happen to you!
Successful Kickstarter projects for novels and books can go upside down for several reasons. A few of the most common pitfalls:
It could be worse: it could be death. Whatever you make on any crowdfunding site will be reported to the IRS (and, if you create your own crowdfunding site on your blog or website, you’ll be breaking the law if you don’t report it for yourself).
Don’t forget local taxes, too. I live in Washington State, where I must collect sales tax, which means keeping track of which customers hail from this state and deducting the tax amount from the total received. That means I make less on local customers than I do on people out of state—but, hey, that’s the law, and it supports schools and so forth. I also have to pay business taxes on the gross (not the net) for both city and state. The point is this: know your tax laws, and you should seriously consider consulting a tax professional before you begin.
For more on taxes and Kickstarter, you should read Stonemaier Games’s excellent blog series on this topic (you should read it for other topics as well: it’s full of invaluable gems of crowdfunding advice). They point out that if you run your campaign at the end of a year then you will have to pay the taxes as part of that calendar year, but you won’t gain deductions for production, shipping, or any business expenses until the following year. Therefore, think twice about running your Kickstarter after September, and be sure to consult that tax professional!
If you ask me, Kickstarter fees are very reasonable. They take a flat 5%, plus credit card fees which vary by the card but tend to be around 3.5%. When I was planning my campaign, I rounded up to 10% just to be safe. Not bad, but, combined with taxes, adds up to a factor you should definitely consider when pricing. Indiegogo charges slightly less, and you can also set up your own crowdfunding site, but you may find it harder to build up momentum if you do it on your own.
More than any other factor, shipping can murder the profitability of a successful campaign. Electronic products are brilliant because you can deliver them anywhere in the world via email or by setting up a password-secured FTP site for your backers. Physical things, however, require physical motion, and that gets pricy.
Shipping costs are subject to rapid change—if the price of gas goes up, the post office is very likely to raise their rates. If it goes down, they’re not likely to lower them. Check with the US Post Office for the latest rates and nearby locations—you are almost certainly better off waiting in line at the USPS than paying the steep fees at a privately-owned mailbox center. If you don’t believe me, go ship the same item from each facility and your eyes will bug out of your head like Roger Rabbit when you see the price difference.
For figuring out international rates, Paul Roman Martinez of the 19xx has a brilliant suggestion about international Starbucks locations. Read it in tip #11 of 11 Things All Failed Kickstarter Projects Do Wrong.
The good news is that if what you’re shipping consists of books (either on paper or in an electronic format recorded on a digital storage device), then you should send it by media mail. At the time of this writing, it costs $2.61 to send a typical paperback via media mail. Keep in mind that if you put a t-shirt or other add-on reward in with the book, the package is no longer eligible as media mail. The post office reserves the right to open and inspect media mail packages to make sure they fit the requirements, but I’ve never known them to do this.
Shipping internationally is another cost hazard, and the prices here can fluctuate even faster. I know people who have watched helplessly as the international shipping rates jumped up 50% between the time their campaign closed and when they shipped orders, and this ate up just about all their profits.
Finally, don’t forget the cost of envelopes! For books, I order padded envelopes (6” x 9” for my books which measure 5.25×8”) in boxes of 100 through Amazon.com and they come out to be about 20 cents each. That doesn’t sound too bad, but you still need to factor in that cost, and you may find that you require other, more expensive packaging. Those nickels and dimes will add up if you don’t keep a close eye on them.
Add-On Prices & Minimum Orders
If you’re like me, you might be tempted to throw in all kinds of stylized swag: coffee mugs emblazoned with your cover image, Christmas tree ornaments bearing your characters’ faces, and customized USB drives in the shape of the ship your space-jockey character pilots throughout the multiverse—these are just a few of the things that are readily available through a myriad of manufacturers of promotional items.
Swag is awesome, but it almost always require set-up fees which you really must factor into each unit. If it costs $50 to set up the print run and you’re going to sell a hundred, then it’s no big deal. But if you only sell ten, then your $5 coffee mug is really $10, and that’s only the wholesale cost. Don’t forget shipping prices, because you have to pay twice: once to ship to you and then again to ship to your customers.
Even if a certain item is cheap enough for your personal use, you’re going to have to significantly increase the price to backers in order to overcome the other financial frictions such as taxes, shipping, and site fees. I wanted to do some very fancy credit-card USB drives for my upcoming Kickstarter for GHOST STORM, but would people really want to pay $30 for a 4 gigabyte USB drive? I doubted it, so I skipped it.
How much markup?
The standard markup is double or more. That means if you pay $10 for a t-shirt, you will almost certainly need to charge at least $20. For the THE NON-ZOMBIE APOCALYPSE crowdfunding campaign, I felt kind of guilty doubling the price of my items, but I crunched the numbers over and over and found that it was absolutely necessary. It also meant I had to forget about some of the nifty goodies I wanted to make. (More on what add-on rewards you might create in my next post)
My advice here is the same as my advice in my last post: if this is your first Kickstarter, run it as small as possible! If you skip some or all of the fancy promotional products, it will mean you can lower your required goal, which increases your chance of success and may also increase your profit margin. Also, having too many goodies and gizmos tends to distract from what you’re really trying to sell. After you’ve run one crowdfunding campaign, you will have a ballpark idea of how many backers you can expect the next time around and then you’ll be able to make a more informed decision about which bells and whistles you can add.