Product Development in Crowdfunding: Theoretical and Empirical Analysis

Abstract

Problem definition: Crowdfunding goes beyond raising funds. Entrepreneurs often use crowdfunding to solicit feedback from customers in order to improve their products, and may therefore prefer to launch their crowdfunding campaigns using basic versions of their products with fewer features. However, customers may not be persuaded by a campaign if the product appears to be underdeveloped. In view of this trade-off, a key question for entrepreneurs is how much to develop a product before launching a crowdfunding campaign. Methodology/results: Analyzing a game-theoretical model and testing its predictions empirically, we study: 1) how the development level of a product at campaign launch, measured by the initial number of product features, influences whether customers will make comments that help entrepreneurs improve the product; 2) whether entrepreneurs continue to improve the product during the campaign; and 3) whether the campaign is successful. We show that, as the number of product features at campaign launch increases, the likelihood that customers will make comments and that the product will be improved during the campaign first increases but then decreases. Furthermore, the likelihood of campaign success first increases but then decreases with the number of product features at campaign launch. Finally, by analyzing the interactions between customer feedback, product improvement, and campaign success, we show that customer feedback motivates entrepreneurs to improve the product during the campaign. Moreover, entrepreneurs should take account of the initial number of features and customer feedback when improving the product, because otherwise product improvements can harm campaign success. Managerial implications: Our study provides practical insights on how entrepreneurs can use crowdfunding to aid product development and improvement. Specifically, entrepreneurs should avoid overdeveloping their products before crowdfunding campaigns because, as well as decreasing the chance of campaign success, this could hinder their ability to save development costs (e.g., market research costs) through involving customers in product development.

Keywords: product development, entrepreneurship, innovation, natural language processing