THE FORM OF CROWDFUNDING

The consumer’s role has recently expanded to include investment support. This phenomenon, called crowd-funding, it is a collective effort by people who network and pool their money together, usually via the internet, in order to invest in and support efforts initiated by other people or organizations. The idea that some people may decide to pay for producing and promoting a product (instead of buying it), and bear the risk associated with that decision, represents a further step in the evolution of consumers’ roles, that involves a mix of entrepreneurship and social network participation.

There are two forms within crowd funding. First form, consumers were invited by entrepreneur to pre-order the product for example many projects on Kickstarter are funded in that form. To be able to launch production, the amount collected by the entrepreneur through pre-ordering must cover the required amount of capital. Because any remaining consumers will pay a different price when the product is on the market, pre-ordering enables the entrepreneur to price discriminate between the first group (those who pre-order and thus constitute the funding “crowd”) and the second group (the other regular consumers who wait until the product is available to purchase it). This form of crowdfunding constitutes a special form of behavior-based price discrimination, because consumers self-select into one group according to their personal preferences. In the second form of crowdfunding, the entrepreneur solicits individuals to provide money in exchange for a share of the profits or even to purchase equity securities issued by the firm (e.g., cartoon projects on the platform Sandawe rely on this form). These investors may or may not decide to become customers at a later stage. It is called profit sharing crowdfunding. In both forms of crowdfunding, the participants to the crowdfunding mechanism, whom we refer to as “crowdfunders”, enjoy some additional utility over other,  regular” consumers. Crowdfunding is most often associated with community-based experiences that generate “community benefits” for participants.

Through price discrimination, the entrepreneur can extract some of the community benefits from crowdfunders through this discriminatory price setting. Conversely, when the amount of capital needed is large, the entrepreneur is forced to distort the optimal pricing scheme to attract more people to pre-order; otherwise, he or she may not be able to raise enough money to begin with. The larger this distortion, the smaller are the gains from opting for pre-ordering. Crowdfunding through profit sharing, the benefits will be higher higher when capital requirements are large. For larger capital requirements, entrepreneurs prefer to have the up-front investment financed through investor contributions rather than through pre-sales of the product, even if fewer individuals end up buying the product.

When crowdfunding comes from pre-ordering, community benefits stem directly from the consumption experience. For example, in Verity Price's case, crowdfunders could vote on which songs were on the album and what artwork was used; in the case of Blender Foundation, crowdfunders enjoyed being part of user groups that made open source of the software possible. These community benefits assessed by assuming that crowdfunders perceive an increase in the product quality, Community benefits therefore increase the crowdfunders' utility in proportion to their taste parameter: a consumer who values the product will also value the enhanced consumption experience that crowdfunding provides.

In contrast, when crowdfunding comes from profit sharing, community benefits are related more to investment than to consumption. Participating in crowdfunding is through investment, and the crowd can support the firm without necessarily becoming a consumer. Crowdfunders enjoy an increase in utility because they value the feeling of belonging to a group of “special” or “privileged” individuals (individuals who contributed to the very existence of the product). As mentioned previously, Seedmatch organizes meetings between crowdfunders and founders of the funded companies. Here, community benefits do not depend on the identity of the consumers, all crowdfunders enjoy the same increase in utility, regardless of their taste parameter.