Understanding Profit Margin and Costs

When someone backs your project and selects a reward, there is a cost associated with producing that item. The difference between what it costs you to produce the reward, and the amount of money a backer pledges, is the profit margin. Kickstarter projects aren’t really about making a “profit,” but it’s one of the most important metrics in business and can help you structure your project effectively.

Lets say you are offering a DVD and DVDs cost about $5 to produce. It also costs a dollar to ship the DVD to your backers. That means the total cost to produce the DVD is about $6. If you sold a DVD for $10, and it coats you $6 to produce then you are making $4 of profit. This profit is going to be used to complete the rest of your project, and having a poor profit margin can hurt your ability to complete it.

If the example project got 100 backers who chose the DVD, then one might think the project creator has received $1000. However, when the cost to produce the DVDs is removed, the creator only made $400 in profit. You need to make sure the profit margin is great enough to honor the reward system and still cover the project’s cost. I will get into how to price rewards later, but right now, you need to know what it will cost you to produce all the items you want to make.

Not every Kickstarter venture is launched with the intent of making money. However, if you want to launch a project as a business, having a healthy profit margin is important.

“‘If I was being realistic, we probably needed $10,000 to $15,000 to get started, and these things should cost at least $750,’ she added. ‘Below $750 is a losing enterprise.’” – Paula Patterson On Kickstarter, Designers’ Dreams Materialize, NY Times

Fixed Costs and Variable Costs

When creating your budget, you need to account for both the fixed cost and variable costs.

Fixed costs – The costs that will not change as the number of backers increases. This could be the cost of supplies, travel, or any other expense related to the creation of your project.

Variable costs – The cost that will change depending on the number of backers you receive. These costs can go up or down, but the important thing is that they change. For example, if you’re making a book the more backers you receive, the more shipping costs you have. However, it will be cheaper to produce the book since many publishers give discounts for larger orders.

A Kickstart’s Guide to Kickstarter TOC:

pssst…you can read all of this offline by downloading the e-book.