Welcome to Crowdfunding for Authors #3, in this installment, I’ll be talking about evaluating your project’s costs and pricing your rewards correctly. As authors, we have several costs to evaluate when pricing our rewards, and a variety of sources to choose from. Your funding goal should be the MINIMUM amount of money you’ll need to raise to make your project happen. This will be enough to cover your fixed expenses while still being able to deliver all rewards comfortably. We’ll be using a few methods of cost evaluation and some simple financial formulas to evaluate costs, price rewards, and set the funding goal for the campaign.
Fixed versus variable costs
For your project, you’re going to have a mix of fixed and variable costs. Fixed costs include cover design, editing, and any promotional graphics you purchase. These costs are going to be the same whether you sell one book or one thousand books. These are the primary cost drivers that we’re going to be trying to recover with the campaign.
Variable costs are the costs that scale with volume. They include physical items such as printed books and bookmarks, shipping costs, and project fees. As your volume increases, so will these costs, but hopefully at a constant rate or at decreasing variable cost.
Evaluate all of your costs and identify if they are a fixed or variable cost. Be sure to add another 10% as a variable cost that will be taken as fees for using your Crowdfunding platform (Total money raised – (total money raised * .10) If your actual production costs end up lower than expected, then you’ll have some room to offer extra bonuses to your backers as a surprise.
Setting your funding goal
Setting your funding goal is actually the easiest of the financial work you’ll have to do for your crowdfunding project. Your funding goal should be equal to your project’s fixed costs, no more, no less. I’ll explain why using contribution margin.
Pricing your rewards with Contribution margin
Contribution margin is the single most important formula we’ll be using to price rewards and set a funding goal. It is defined as total sales revenue – total variable costs. If you’re breaking it down by unit, it is equal to sales revenue per unit – unit variable costs.
Contribution margin tells us how much of each sale is going toward fixed costs and can be used to calculate the number of units needed to break even on the fixed cost investments such as editing, cover design, and any promo content you have made for the campaign. If you’re selling digital copies of your book, these will have the highest contribution as the only variable cost is platform fees for the platform you ran your crowdfunding campaign on. Using Contribution margin, you can mess around with the sales revenue per book until you have a positive contribution margin and one that is realistic to cover your fixed costs. Be sure to look at the pricing from other comparable campaigns for books of similar genre and length then try to apply their pricing against your variable costs. Once you’ve covered your fixed costs, the contribution margin of each sale will be going straight to your pocket as profit, so exceeding your funding goal is very beneficial as a creator and will give you some extra money to budget for advertising as you move toward your retail launch.
Fair pricing means happy backers
When pricing your rewards, you should set your cost lower to or equal to your planned retail prices, AND offer some extra goodies that the retail versions of your book(s) don’t include. You want to incentivize your backers to support your early on, and the best way to do that is to offer them exceptional value. Also try to budget some money to build up an inventory that exceeds what you’ll need to ship to backers, because more people will likely want to buy the book from you (friends, peers, and family) once they see the book is a tangible object and not just a 3d mockup of what it would look like. You can offer the special crowdfunding editions, but keep your pricing consistent so that you don’t anger anyone or discourage your backers from supporting you in the future.
I made the mistake of pricing my Kickstarter rewards too high after overestimating my production costs. Becuase of this, I was left with substantial profit, and retail costs that were lower than what my backers paid. This was a problem. To correct the issue without changing my retail prices, I added extra rewards for each backer that supported me, bring the total value of their rewards up and taking care of them, while being able to keep my retail prices lower while feeling good about it.
In conclusion, do excessive research on your production costs, and price your rewards using the contribution margin formula. Be sure your end prices are lower than your planned retail prices, or include extra value and/or exclusives to your backers for supporting you early on. Good luck, and please feel free to ask any questions you have in the comments below!
Next time in the series: Projecting your project’s timeline.
I hope you all have a wonderful holiday season!
P.S. My prequel novella, Paragon.EXE is available on Amazon for $0.99, or free with Kindle Unlimited. You can pick up a copy here and learn more about how to get the main novel, Absolute Knowledge, right here.