I’m currently putting my rewards in place, and it got me thinking about how my crowdfunding campaign budget is structured around balancing my fixed and variable costs. I thought I should share how I did it!
If you don’t know, I’m about to run a crowdfunding campaign to make it possible to self-publish my second and third books. The books are for teaching kids the names for their feelings through stories (www.JackFeelsBig.NZ).
Before I get to the variable and fixed costs (which help me determine how big my campaign needs to be to work) I should mention upfront costs. These are things you have to pay before your campaign. You’ll be paying them whether it succeeds or not. My philosophy on these costs is that they are an investment that you need to be willing to bear. I’m hoping to gain these back through profits in ongoing sales of my books. For some campaigns, it may be that you just don’t plan to recover these costs. More on that later. Here’s my example:
- Demo illustrations ($300)
- Advertising costs for crowdbuilding ($30)
- Hours and blood and sweat and tears
- Total Upfront Costs ($330)
One other thing before I plunge into this calculation: it’s iterative. My initial plan for my first campaign was 3 books with 6 stories each. When I got to the end of my first run through this calculation process I reckoned I would need to raise $20,000. That was more than I could reasonably expect to raise, so I reduced my fixed costs by making my first campaign for one book only (illustrations costs divided by three) and reduced my variable costs by making the book contain 5 stories instead of 6. This gave me a $5,000 goal and a much better shot at making it. But onto the Variable / Fixed costs balancing act!
Variable costs, in this context, are what it costs for each unit of your main reward.My main reward is a copy of the book for pledging $25 (a very popular reward point, worth putting special thought into, as I explain here). A ball park estimate for each of my costs:
- Postage ($2.50)
- Crowdfunding platform fee ($1.25 – 5%)
- Credit card processing fees ($0.75 – 3%)
- Printing ($5.5*)
- Total Variable Costs $10
- Available for Fixed Costs $15 (aka gross profit)
Fixed costs are those that you’re going to have to pay for once, regardless of how many of your rewards you send out. I don’t have my actual estimates handy, but off the top of my head:
- Illustrations ($6,500)
- Editing Services ($1,500)
- Total Fixed Costs $8,000
So, I need to sell enough books that the $15 of gross profit covers my $8,000 of fixed costs.
Campaign Goal = Total Fixed Costs x (Main Reward Price/Gross Profit)
According to this calculation, I’ll need to raise $13,333 by pre-selling 534 books. That will perfectly balance my fixed costs and variable costs.
If I set my goal higher than this, I will be able to take net profit at the end of the campaign, but only if it is successful (if adding this fat into the goal means I miss it, I’ll still have to wear any upfront costs). I would discourage padding the goal. There’s more value in succeeding than just the cash.
If I set my goal lower than this, I will end up with less money than I need to deliver. This is a bit irresponsible, even if I think I’ll be able to cover the shortfall. It would be better to adjust the project to bring make it more achievable.
One last note on this calculation. Its got a lot of assumptions and should only be seen as a guide (my campaign goal will definitely not be $13,333). There’s always risk of things costing more than expected. In my first campaign I accepted some scope creep and added some extra pages. This meant more illustrations and higher print cost. On the other hand, there are other rewards that people can pledge on. My approach was to ensure that all of these had an equal or higher gross profit ratio. This meant that for every pledge on something other than the main reward, I actually did a little bit better. This helped balance out the cost overruns, and in the end the campaign didn’t cost me too much!
Well, that’s all from me for now. I plan to revisit this. I’d like to put together an online calculator so that people can try it for their own idea. Let me know what you think in the comments!
*The cost for printing was quite tricky for me, as it shifts with the size of the run. I had to get quotes and calculate, then requotes and recalculate to narrow it down.