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 with less developed products. Yet, customers may not be persuaded by a campaign if a product appears insufficiently developed. In view of this trade-off, a key question for an entrepreneur is how far a product should be developed before launching a crowdfunding campaign. Analyzing a game-theoretical model and testing its predictions empirically, we study how a product's initial development level influences both whether an entrepreneur continues to improve the product during the campaign and whether the campaign is successful. We show that as the initial development level 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, while our theoretical model intuitively predicts that the likelihood of campaign success will always increase with the initial development level, our empirical analysis shows that there is first an increase but then an unexpected decrease. We find that this discrepancy can be explained by feature fatigue, and we incorporate this effect into our theoretical model to generate prescriptions about the initial development level and product improvement during the campaign. While crowdfunding experts believe that products should be as developed as possible before a campaign, we show that this is not always the best strategy