## Monday, January 19, 2015

### My Dog Ate My KS Funds (part 4 of 10)

4: The Math behind Rewards

The object of a crowd funded project is not to gross as much money as possible, but to keep your costs from running beyond the gross sales while maintaining a profit or break even point.   Rewards cannot simply be given away indefinitely, there is a limit.  If you go over the limit, you’re now taking a loss and the project will fail unless you chip in your own money.  Here is an example of how to calculate when each new stretch goal can be afforded.

Starting pledge level example:  You want to create 10 human sized figures and sell them for a pledge for \$30.00.  The pledge value is one of many values that can be tweaked and changed to make the project break even or profitable.  You’re going to lose roughly 10% of all the funds you raise due to credit card processing fees and crowd funding fees.  So you will actually be receiving \$27 per pledge.

Pre-production cost value example:  Your sculptor quotes you \$3,000 for 10 humans and a mold maker quotes you \$100 for a master mold and \$600 for production molds for a base total of \$3,700.

Core packaging cost value example:  Remember in article #2 (Income tax and profits) I showed my total costs per pledge?  Use that same logic to create what your cost will be per pledge in packaging materials, zip baggies, paper costs, etc.  Let’s say \$2.00 not counting the cost per figure.

Production cost value example: Each human figure costs 75 cents to cast if outsourced or 25 cents if you own your own equipment but for the sake of this article we will assume you are outsourcing which is what most miniature crowdfunders do.   10 figures cast at 75 cents = \$7.50 per pledge plus the \$2 in core packaging fees = \$9.50 cost per pledge.

Goal calculation example: Using your starting pledge level of \$30 for 10 figures (not counting shipping charges), your profit per pledge will be \$17.50 (production cost of \$9.50 minus \$27 due to fees off the \$30).  Divide \$17.50 into the initial pre production value of \$3,700 you want to raise = 211 pledges.  Your “Goal” is now 211 x \$30 (not counting shipping) or \$6,330 to break even.

Shipping charges:  For the sake of simplicity, we will leave out the calculation of shipping charges and cover that in article #5.  Remember to multiply the shipping charge received by (1.1) to take into account the 10% extra you will need due to crowdfunding fees.

Stretch goal #1 example:  Stretch goals are not necessary crowdfunding requirements but are greatly appreciated bonus figures to supporters causing many of your supporters to spread the word about your project.
One additional stretch goal pre production cost sculpture and molds work \$370.00 (estimated based on the average cost to make 10)  added to the “Pre-production cost” \$3,700 = \$4,070.  Take your production cost value of \$9.50 add in the #1 stretch goal casting cost of .75 cents = \$10.25 minus \$27 remaining pledge your new profit per pledge is \$16.75 divided into the new “pre-production” total of \$4,070 in this example 243 x \$30 your next “Goal calculation” is \$7,290.  In other words, when pledges reach \$7,290 you can afford to add in ONE human sized stretch goal to the initial \$30 pledge and still break even on the project.  That is an increase of \$960 from your original starting goal.  This is assuming your stretch goal is the same size/weight etc as all of the figures in the project and you only have to create one set of molds per figure with metal castings.

Stretch goal #2 example:  Using the same formula, watch the compounded costs increase outcome per stretch goal added.  Pre-production cost \$370 + \$4,070 = \$4,440.  Production cost 75 cents + \$10.25 = \$11.00 minus \$27 pledge level = \$16.00 divided into pre-production \$4,440 = 278 x \$30 = \$8,340.   The new increase is \$1,080 to break even and add in stretch goal #2 to the \$30 pledge level.

Stretch goals compounded costs on a \$30 pledge:
Initial goal to break even \$6,330 ….................10 figures     211 pledges
Stretch goal #1  \$7,290   (\$960 increase) …….11th figure   243 pledges
Stretch goal #2  \$8,340   (\$1,050 increase) …..12th figure   278 pledges
Stretch goal #3  \$9,450    (\$1,110 increase) ….13th figure   315 pledges
Stretch goal #4  \$10,710  (\$1,260 increase) .…14th figure   357 pledges
Stretch goal #5  \$12,120  (\$1,410 increase) .…15th figure   404 pledges
Stretch goal #6  \$13,650  (\$1,530 increase) .…16th figure   455 pledges

When would stretch goals begin losing money?  As soon as your combined production costs, pre-production costs, and core package costs reach \$27.  In this example, by stretch goal #23, assuming that every sculpture, casting costs, and mold work costs are the same.

Remember to always double check the math on all stretch goals.
(Example using stretch goal #5)
Sculptures 15 x \$370 = \$5,550
Cast figures 15 x .75 = \$11.25 x 404 pledges =\$4,545
Core package costs \$2.00 x 404 pledges = \$808
Subtotal \$10,903
Gross sales \$27 x 404 pledges = \$10,908 (\$5 off to my advantage because I rounded up or down on some of the fractions in the example)
Gross sales before 10% fee \$30 x 404 pledges = \$12,120

Note that this article is a rough calculation and is designed to show the math behind compounding.  There are plenty of “variables” that will greatly alter the calculation such as a higher dollar pledges to increase profits, casting or sculpting your own figures, giving away rewards that are overstock, lower processing fees, smaller or larger figures, free or reduced shipping, increased shipping charges due to added rewards, etc.

Crowdfunders:  Thoroughly work out the math first and get quotes for mold and casting work from many sources.  Always round up to protect against error, but be prepared to take a loss if necessary because there can be unforeseen expenses when you are starting with absolutely nothing.

Pledgers:  Avoid projects where stretch goals vary in size dramatically.  Larger figures such as monsters cost two to 10 times more to produce and make calculating costs for the project creator nearly impossible.  Therefore, the project could be at risk of failure.

Next week:  Shipping and Scaling Up

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