Crowdfunding rewards: the power of scarcity
Does scarcity of crowdfunding rewards impact backer behaviour?
There has been a great deal of work to suggest that product scarcity influences consumer behaviour. For example, rare bottles of alcohol, or paintings, are more highly valued - and sought-after - than more abundant ones. This effect is not only limited to physical sales, but is replicated in the online world. Indeed, scarcity was one of the key selling points for NFT’s and certainly played a role in the eye-watering price of the Wu Tang Clan album “Once upon a time in Shaolin.”
Scarcity is baked into the very foundations of (most) reward-based crowdfunding, as projects are only live for a finite amount of time. This is certainly true of platforms such as Kickstarter, which work on an all-or-nothing model, but there are variations to this model such as Crowdfundr, which allows you to ‘roll-over’ your campaign into an online store, even if you haven’t met your funding goal.
Given the power of scarcity, can creators induce additional scarcity to their campaigns? For some products (such as comics), the answer is yes. Limited print runs, and limited edition variant covers, are also ways to increase the scarcity of a product.
But what about other products that are not easily offered in a limited format? Can scarcity play a role? If so, what is its impact?
To answer this question, I turned to this paper which aimed to address just such a question in the context of crowdfunding. The authors utilized a clever experimental design to test their hypothesis that backers are more likely to back rewards that are more scarce.
To understand this behaviour, the authors created a fictitious movie project which mimicked a traditional Kickstarter campaign page, offering a total of eight reward tiers. Unlike other experiments, the tiers closely resemble a realistic range of rewards, in the sense that tiers are ordered according to price, and that higher-priced reward tiers typically included all the rewards from lower-priced tiers (which is common for crowdfunding projects).
Participants were given 50 ‘coins’ for the experiment, and were notified they would be rewarded with double their pledge should the project be funded - so they were incentivized to see the project succeed. Conversely, they would lose their pledge if the project was not funded (which is not what happens in real life, but does capture the disappointment associated with an unsuccessful campaign).
The clever twist that the authors added, was that only two of the total eight reward tiers were available, forcing backers to choose between one cheap (non-physical) reward at 10 coins, and one more expensive (physical) one at 50 coins.
The experiment further used a 2X2 experimental design to explore scarcity, keeping all other campaign factors constant, which led to four potential study arms:
High scarcity of the lower tier reward (i.e., low tier has only 5 left of 50).
High scarcity of the higher tier reward (i.e., high tier has only 5 left of 50).
Low scarcity of the lower tier reward (i.e., low tier has 15 left of 50).
Low scarcity of the higher tier reward (i.e., high tier has 15 left of 50).
Two hundred participants were randomized across each of these four arms and their backing decisions were tracked. Participants were forced to back one of the tiers (so they couldn’t choose to pass on the project, for example) which was an interesting limitation of the experiment.
For the high scarcity study arms, backers overwhelmingly chose the reward tier with the highest scarcity (69% in arm one and 70% in arm two). For the low scarcity arms, backer choice was mixed with 46% selecting the low tier in arm 3, but 69% selected the high tier in arm 4.
The general finding suggests backers prefer scarce rewards, regardless of price. But the authors then did a regression analysis of the data to model the effects, using scarcity level (low or high) as a random factor, and scarcity target (low price tier, high price tier) as a dependent variable. Control variables such as age, gender were also included.
Analysis found that in a simple model (no control variables) where the high price tier was limited, backers were 3.14 times more likely to choose it. When control variables were included in the model, the likelihood increased to 3.24 times. Thus, modelling confirmed the hypothesis, that backers were more likely to back the limited reward.
This is an interesting finding for creators, as it suggests limiting reward tiers can actually make them more desirable, regardless of price - although there are other factors that could influence decision-making (e.g., personal preference, budget).
So, should creators artificially limit the number of higher-price tiers available to make them more attractive? The data suggests it might be a good strategy. However, as the authors concede, their experimental design was still not as realistic as it could be - as there were only two reward tiers available, and the backers had to pick one project.
One thing that occurred to me as I read the paper, was that the unavailable rewards may also have influenced the scarcity level, as a potential backer may have understood the project to be so popular that certain tiers were no longer available.
Interestingly, this has already been studied in the literature under the name “phantom reward theory,” where the unavailable rewards are “phantoms” since they are still visible on the campaign page and may have an influence on decision-making.
One simple example for us to consider are early-bird rewards, which are sometimes offered by creators to incentivize early backers. These rewards are usually time-limited (first 24 or 48 hours) and priced at a lower value than the regularly-priced reward.
The impact of early-bird rewards was examined in this paper, which is sadly behind another pay-wall. However, the abstract highlights the main findings which support the scarcity hypothesis in relation to phantom rewards.
This paper suggests the presence of phantom rewards make backers select equivalent (but higher-priced) reward tiers more often, and this effect is stronger when the early-bird discount was modest (i.e., not large). The implication here is that creators may benefit from offering limited early-bird rewards, with only a small discount relative to the regular-price.
However, the devil is in the details, and a full review of the article would help understand the limitations of this finding.
What do we learn from this work?
Scarcity is an important motivating factor when it comes to decision-making, and while scarcity is built into the design of a time-limited campaign, creators can also induce additional scarcity by careful creation of reward tiers.
For example, creators should offer early-bird rewards that have a small price reduction relative to the regular reward tier. But they may also want to consider offering multiple such tiers that expire at differing times, so that some tiers quickly become phantoms.
Creators could also consider limiting their highest-priced tiers to induce a sense of scarcity. For artists, this could mean offering to provide cover art for other products, while for writers it could mean offering services such as editing or writing for other campaigns. The challenge is to make these tiers attractive, as they are frequently at a higher price point relative to other tiers. So while they may appear scarce, they may also be too expensive for some backers. This raises a question whether these higher-priced tiers could act as a pricing ‘anchor’ for backers, but that’s outside the scope of this discussion.
Perhaps another (but riskier) move is to impose limitation on the mid-priced tiers. This may be counter-intuitive, as most creators simply want to get as many backers as they can (at any tier), but strategic limitation could be beneficial in the right circumstances. Right now, I don’t know what these are, but I’m open to experimenting on my future campaigns to see if this effect is real.
What do you think? Do you agree with the hypothesis? What other ways could be used to induce artificial scarcity for projects? Drop me a line in the comments.
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