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There's been some discussion lately about setting "fair" kickstarter budget targets; during a chat with @IHeartFargo I had an epiphany. Your KS target shouldn't cover your whole budget; it should cover your REMAINING fixed costs. Thread:
Imagine you're planning a 64-page, art-filled rulebook. By the time you're ready to Kickstart you've spent $15,000 in fixed costs (e.g. let's say mostly writing time), but you need another $5k in art to publish. The total fixed costs is $20k.
(Fixed costs are costs that don't increase the more you sell—you only write/edit/illustrate the book once, regardless of how many copies you sell. In contrast, variable or per-unit costs like printing do rise with each unit sold.)
Your book is priced at $20, and it costs you $10 to deliver that book in unit costs, for a $10 margin. This means you need 2,000 books to cover your fixed costs and break even.
What should you set your KS funding target at? One school of thought is that you should set it at 2,000 books. If you're not going to break even, why do it?
The problem with this logic is that $15k is already spent, unrecoverable. Sure, if you don't fund, you don't buy the $5k in additional art, but you're $15k in the hole.
Let's say disaster strikes and you only find 1,999 backers, one short of your target. Your project doesn't fund and you wind up with no sales revenue. Your final position is -$15k.
As an alternative, imagine you could keep those 1,999 sales and go forward, despite not breaking even. What's your final position? Turns out it's just $10 shy of breaking even. That's way, way better than $15k in the hole! So obviously 1,999 is a better KS target than 2000.
Continue this logic. If all we care about is being in the least crappy final financial position, what's the minimum number of sales we can tolerate to go forward?
If I only get one sale (thanks, mom!), it's a total disaster. I spend the additional $5k on art, plus $10 to get mom's book printed, for a total budget of $20,010, offset by $20 in sales - for a final position of -$19,990. Disaster.
For this hypothetical balance sheet, 500 sales is the magic number. With $20k in fixed costs, plus another $5k to get those books printed, offset by $10k in revenue, my final position is -$15k. That's terrible, but it's no worse than not funding!
Every sale more than 500 improves my final position. At 600 sales, my final position is -$14k. That's terrible, but it's $1k better off than if I pulled the plug on my project at KS time (e.g. due to failing to fund).
This is a toy model, obviously, to illustrate the principle: if I set my KS funding target at 2,000 to cover my whole budget, I'm making a bad financial decision. The right KS target is 500 sales, much less than my break-even point.
Coming out of a project $14k in the hole is terrible, but at the point in time where I'm about to Kickstart, there's no way to get that money back. The target I'm trying to beat is "$15k in the hole", not break even.
