In the first of our series on the principles of crowdfunding we explored the ideas of the Long Tail and the atomization of sums raised. We continue on with part two of the series this time looking at the role and imperative of Low Transactions costs and the declining barriers to participation that are so central to how crowdfunding works.
Low Transaction costs
For the Long Tail to be an effective operational model the incremental cost of each transaction must be low enough to ensure that the sums raised are not consumed by aggregating costs as well. The online e-commerce world has achieved this by reducing retail space costs by removing the need for a bricks and mortar presence. Selling on line and distributing from huge logistics bases has driven down the costs of each transaction markedly. In the crowdfunding environment the same effect is delivered by platforms which take the pain out of establishing the necessary logistical and processing architecture to run a campaign and, in so doing, making it possible and economically sustainable to keep the costs of collecting each donation or investment very low.
It is for this reason that over burdensome regulation and legislation is such a potential problem for crowdfunding. The higher the regulatory burden for a platform the higher the costs they will, inevitably, have to pass on to their users. This in turn will mean that crowdfunders will increase their targets in order to cover the cost of the campaign and, by extension, drive down success rates. Oddly, from a regulator’s point of view, it may well prove counter productive by driving more projects to run unregulated DIY campaigns to maximise returns and so ultimately undoing and undermining what they might be setting out to do.
Declining Barriers to Participation
One of the principal benefits of the online world and Web 2.0 in particular is the idea of declining barriers to participation. It is ever easier for people to become active, engaged participants online. This might be buying or selling, starting business, expressing views or any number of activities that were once more problematic and challenging to undertake. Crowdfunding is a beneficiary of this and you might imagine that for the Long Tail to work well that ability of large numbers of people to get involved is key. It must be easy for people to find, engage with and share a crowdfunding campaign. A key reason for expanding participation in a crowdfunding context is to ensure that the flow of new previously unavailable funds are unlocked for use in this market place.
So not only is the general principle of low and the declining barriers important to provide the resources to support the crowdfunding sector in general, you need to employ the same principle at a project level by offering rewards or investment opportunities that are low enough to make it a simple and low risk decision to engage. The more people that can get involved the more you can raise and the greater diversity of insights skills and expertise that are on offer.