Before I get into this, I want to throw out a disclaimer.  I don’t know anyone’s true costs or bottom line, only what I can hypothesize from my own experiences in running Kickstarters and cost research in the areas in question.  Certainly, costs can be mitigated to some degree by large volume orders, current pre-existing stock of product,’creative’ accounting, etc.

Good, now with that out of the way, I can certainly be accused of having Kickstarter on the brain, but I’m sure I’m not the only one out there with this problem.  As this platform continues to grow in the consciousness of our ‘incredible shrinking world’ society, and its power doesn’t seem to be dwindling, I’m going to give readers more advice that I’ve gleaned from my five successful, and one ongoing, Kickstarter campaigns.

First and foremost, I want to reiterate what Kickstarter truly is: a platform by which creative people can gain funding to create projects that otherwise would not be possible. The key word there is ‘funding’ and in the current landscape of the Kickstarter universe, that is becoming a very murky proposition.

You see, at some point a project creator came up with an idea that has now been termed a ‘stretch goal.’  This new process is inherently a means to push funding to a more outrageous level by expanding the parameters of the initial project with increased rewards.  Sounds great, right?  In terms of the product creators that followed, it was kind of like the McDonald’s formula of ‘super-sizing,’ but unlike this corporate food titan, the bulk of Kickstarter project managers don’t have the marketing and accounting minds of the golden arches to make sure their numbers make sense.

Here is the rub, where a super-sized Coke gains the fast food company a tidy profit for the up-sell versus the price of the increased volume of diluted beverage, stretch goals in Kickstarters often have costs far outweighing the sum total of the backer pledge.  That is the antitheses of everything a Kickstarter is about, meaning that the project manager is trying to gain funding to create a project, not lose money in the creation to the point where a project is quickly underwater and therefore at risk of a non-delivery.

I’ve often had potential backers, and even project participants, question my backer rewards because of a perceived lack of value.  My response is always two-fold.  A: It is my responsibility to my backers to see this project completed and shipped, and to do that I must watch my bottom line. And B: This is a platform to help fund projects, not provide backers with a high volume of ‘stuff.’

While I appreciate a Kickstarter in which much ‘stuff’ is given, I’ve also been burned when promises exceed actual pledge amounts and projects fail to deliver anything (see my last Kickstarter article).  So in the end, a balance must be struck. 

First off, for those of you who are thinking of doing a Kickstarter, I would provide a couple of numbers that are highly important to your project before you begin to calculate what backer rewards should be offered at any level.

First, you must understand that Kickstarter will take a transaction fee of 5% of your gross, and an additional 3-5% for third party transactions of credit cards.  So, in essence, it is a good practice to look at your final sales gross as 10% lower than it actually is.  Second, and even more importantly, Kickstarter projects are taxed by the U.S. government at nearly 30% of your gross sales total, NOT your net take after all production cost has been taken out.   These numbers are not just made up, BTW, I’ve lived them.

Thus, including the Kickstarter fee, your pledge total is realistically 40% lower than it actually looks sitting there all shiny on your successfully funded project page. 

So, let’s do some numbers.  If you successfully funded a $10,000 Kickstarter, and you’d done your numbers pre-launch on that figure with a perceived cost to you for rewards and overall production cost at $8000, you are actually $2000 in the negative just with fees alone before all the unforeseen headaches, delays, and hidden costs start coming into play. 

Another highly unforeseen issue with many projects is the logistics of physical production and shipping. 

In the following, I’m going to try to explain both of the above to the best of my knowledge as a Kickstarter project manager and backer by showing other Kickstarter projects that made me scratch my head.

First, if you wanted to produce a 200 page hardcover RPG with color interiors from a U.S. based printer like Lulu, for example, the per book (unit) cost would be a tad over $62.00 a book.  Yep, you read that right, $62.00 a book!  If you took out interior color, it then drops to a bit more reasonable $20.00 per book; but still, a hefty cost for a physical copy.  This price can be mitigated by a large print run, but that usually doesn’t range beyond an 8-9% discount per book, so for that same color hardcover, you are still talking $50+ and now you are required to have a large sum up front for the production ([and don’t get me started on the cost of shipping of those books in bulk to you!) and a place to put all your overstock that isn’t going out to backers. 

What does this mean?  Well, it means what I’ve seen on at least three RPG Kickstarters I’ve backed last year is that although the project was ‘done’ when the Kickstarter began, significant delays were had once the project managers realized their actual cost and were forced to negotiate a deal for printing overseas, which placed them all in a whole new level of issues (and failed delivery expectations).

As an example of cost versus backer reward, let’s take a look at Larry Elmore’s Hardback Art Book that was $76 away from making a final pledge drive total of $300,000 when it closed in December 2012.  The most intriguing backer level to me for this project was the $49 ‘Fan Package’ level. Originally, this level got you a 256 page hardcover edition of Larry’s newest art book. Great, right? 

Now for the more numbers crunching view, and the following in no way is stating that Larry and his crew aren’t going to fulfill every reward, it’s just looking at their cost of doing business.

So let’s look at that as it stands.  A full-color (color is important to an art book, obviously) 256 page hardcover, if produced at Lulu, would run $75.00+, so we know right off it’s not going to be done there. So now we are looking at an overseas deal I’d assume, and let’s say we can get that cost down to perhaps 1/3^rd a U.S. based printer at $20.00 per book, which I think is doable. So at a $20.00 product cost, the pledge value of $49 has just taken a little more than 40% hit. Now if you take into account the 40% hit from tax & transaction fees, roughly another $20, you are now looking at $9.00 going to cover the remainder of your costs.  Remember, hardcovers are heavy, and even at a U.S. postage book rate, you are probably talking upwards of $3.00 Media Mail per mailing, plus the shipping container cost (the book needs to arrive in nice condition) which hits at about $1.24 per unit for Uline 500 bundle deals on 9X6 book shipping boxes, then add in the cost of the initial bulk shipping from China at $.10 per book or more ($.50 to $.75 for air) and you’ve got yourself close to $4.00 in working capital as a remainder if absolutely nothing goes wrong.  Also not factored into this is the cost of doing business, all of Larry’s work, the cost of the book’s designer, both in draft and digital form, the one-time ISBN fee for the book, and the cost of whatever other partnerships that Larry had to run the project in the first place. 

All the above being said, at the $49 backer level, Larry and his crew might, and I’m saying might, break even on cost without ever taking a dime for all their work that went into getting this project to market, but as they say on late night TV, ‘but wait, there’s more!’

Don’t forget those stretch goals that moved a $17,000 budgeted project to $300,000!  That $49 Fan Package suddenly turned into a treasure trove for backers as new rewards of ‘stuff’ comes rolling in.  At $30,000 in backing, each Fan Package gets the art book upped to 304 Pages!  (Watch out printing price!) At $50,000, each Fan Package now includes three 8 x 10 color prints of Larry’s first three basic D&D covers! (I’ve printed these sizes, and they run roughly $2-4 each depending on quality + shipping!)  At $75,000, the Fan Package gets a 64 page sketchbook included in your package (it’s black & white, but probably $5 to $10 per book roughly depending on binding).  At $100,000, the Fan Package gets three more 8×10 Dragonlance cover prints! (see above for cost) And finally, at $200,000, the art book expands to 336 pages! (again, watch that printing price)

All told, let’s now do some more math.  First, the Kickstarter itself lists the 336 page art book at a value of $80 (retail), and if we can assume that printing cost from an overseas source is 1/3^rd that price, we are sitting at $26 to start.  If you ship everything in one package to a backer, all Media Mail, I’m going for $6.00 + $1.50 for the container, so we are at $33.50, plus the six color prints at $12 total, and the 64 page sketch book at $6.00 we are now at… drum roll, please, $51.50 BEFORE the 40% taken by the U.S. government and Kickstarter.  Total theorized loss per Fan Package backer: an astounding $22.50!

In base terms, you’ve just watched a ‘successful’ Kickstarter turn into a huge money suck!  Even before all the fees and taxation, this Fan Package was a disaster and I have to wonder what the heck the organizers of this Kickstarter were thinking.   How did this help Larry Elmore?  Also, whoever organizes projects like this can create unreal expectations for swag (stuff we all get) in Kickstarters that then has a negative trickle-down to projects that better understand their numbers.

Now some of you might be saying, ‘But wait, Larry can sell that art book for a profit the rest of his life!’  You think?  He just created a 336 page hardcover artbook that has an $80.00 retail price-point (and I’d argue is going to be in breach of Wizards of the Coasts legal agreement that holds that all TSR/WotC trademark artwork placed in a book must be less than 20% of total number of images) which will price him out of most markets.  How many of these will he need to sell at conventions to recapture the $22.50 loss from ONLY the Fan Package level which had a whopping 1016 backers!  (answer: he’d have to sell 423 of these books at a net profit of $54 each to recoup the losses incurred just from the money in the Fan Package at my calculations, not anything else that might have cost money in the Kickstarter).  As I sat looking at this project during its run, I often thought about pledging $49, but in the end I began to realize that I’d be doing Larry a disservice if I did so because I didn’t want to add to his ‘incredible success’ as a person who found his reward structure too good to pass up.  That, I feared, was the primer to his Kickstarter’s success.

And take this into account, Kickstarter based products have almost no retail value.  Why?  Because they are essentially niche markets that have already oversold their market share through the backers that supported them.  Translation, Elmore essentially pre-sold 2083 copies of his hardcover art book, and that will saturate the market of his hardcore fans willing to shell out $80.00 for an art book that basically reprints the half-dozen other art books he’s produced since 1990. 

A prime example of this comes from Steve Jackson’s OGRE Kickstarter from April-May 2012.  It grossed a whopping $923,000 in pledges with over 5,000 backers.  Later that year, when Jackson spoke at a dealer’s convention, he started his discourse to the crowd his admission that he’d done nearly a million dollars on the Kickstarter platform for OGRE and waited for the rousing applause at his accomplishment. The crowd of assembled dealers, however, was silent, dead silent, as anyone would be who had to sell this product.  Jackson quickly realized he wasn’t talking to fans, but retailers, and they wanted to hear nothing of OGRE or his million dollars because they knew full well that a $100 game that had already sold 5,000 units was untenable.  He’d saturated his market, which is basically what Kickstarter does. 

An executive as Hasbro once told me that when one of their games launches, it needs to have at least an initial sell through of 20,000 units to be considered a success.  He also thought it was cute that in the gaming industry, a run of 500 units for a small company was a huge hit, and that 2,000 units for a ‘large’ gaming company was cause for a dance celebration.  That statement is reflected in Jackson’s 5,000 unit pre-sales, almost double what the game is likely to sell on a fresh release.

So if you are doing a Kickstarter on the hope that you ‘just need to get it made’ and then the profits will start rolling in, you are likely to be mistaken.  Your market is your Kickstarter backer, and if you are losing money with them, odds are you are going to be losing money overall.

That said, I’m going to cut this for today as I’ve already gone on far too long, but I hope I’ve once again shed some light on the subject of this incredible platform as well as helping people understand how to look at backer rewards, both as a backer and a project manager.

---

If you like what you read in Art of the Genre, you can listen to me talk about publishing and my current venture with great artists of the fantasy field or even come say hello on Facebook here. And my current RPG Art Blog can be found here. Also, for my hardcore fans and those that love small press books, I’ve launched my latest crowd-sourcing campaign that I’m determined to see become the most successful fantasy fiction Kickstarter of all time, so come help me and all my artist and writer friends create a franchise to remember!