Marketing strategies in reward-based crowdfunding: The role of demand uncertainties

Abstract

Reward-based crowdfunding has become an attractive option for entrepreneurs to launch new businesses. This paper examines crowdfunding entrepreneurs’ decision-making facing uncertain demands to shed light on the quality, pricing, and advertising strategies of crowdfunded products. At the core of our analysis are two fundamental mechanisms of reward-based crowdfunding (the All-Or-Nothing, or AON, funding model and ex-ante pricing) and their interactions with two prevalent demand uncertainties in new product development, namely market size uncertainty and consumer valuation uncertainty. Our results show that AON benefits the entrepreneur by safeguarding against both types of demand uncertainty. Ex-ante pricing, however, is harmful through the uncertainty in consumer valuation but not in market size. AON boosts product quality, price, and advertising spending while ex-ante pricing hinders these important marketing decisions. In further examining how market size versus consumer valuation uncertainty affects new product profitability, we find that greater uncertainty in market size can be profit-enhancing. However, the case of consumer valuation uncertainty is more nuanced, featuring a U-shaped impact on profitability. The paper offers insights and managerial implications to entrepreneurs, investors, and crowdfunding platforms.