Product Development in Crowdfunding: Theoretical and Empirical Analysis

Crowdfunding goes beyond raising funds. Entrepreneurs often use crowdfunding to solicit feedback from customers to improve their products, and may therefore prefer to launch crowdfunding campaigns for a basic version of their products with few or no enhancements (i.e., limited features). Yet, customers may not be persuaded by a campaign if a product appears too basic. In view of this trade-off, a key question for an entrepreneur is how far a product should be enhanced before launching a crowdfunding campaign. Analyzing a game-theoretical model and testing its predictions empirically, we study how a product's level of enhancement at campaign launch influences both whether an entrepreneur continues to improve the product during the campaign and whether the campaign is successful. We show that as the product's level of enhancement at campaign launch increases, the likelihood of product improvement during a campaign at first increases (because customers are more likely to provide feedback) and then decreases (because of increased production cost for the entrepreneur). Furthermore, although our theoretical model intuitively predicts that the likelihood of campaign success will always increase when an entrepreneur launches a campaign for a more enhanced product, our empirical analysis shows that the likelihood of campaign success first increases and then decreases. This counterintuitive result may be due to customers being overwhelmed with the complexity of highly enhanced products. Finally, while crowdfunding experts believe that products should be enhanced as much as possible before a campaign, we show that this is not always the best strategy.