For ages, marketers and venues alike have utilized ingenious tactics to elicit a desired response from prospective customers. An example of this includes casinos limiting windows and clocks within their buildings so that gamblers are less aware of the passage of time, and more likely to remain fixated on their game of choice. Another commonly used tactic is for a grocery or retail store to keep products viewed as ‘essentials' (milk, eggs, etc.) in the far corners of the store. The goal of which is to lure customers in to buying more than they intended, as they are forced to pass by higher profit items on the way to pick up their needs.
Are these tactics actually effective though? In a study recently completed by the Iowa State University, researchers sought to answer this by looking at one tactic in particular – the ‘decoy option'.
The Decoy Option
The idea of a decoy option is nothing new. However, despite being around for decades, it has been unclear until now whether or not it was actually an effective ploy.
The decoy option works by incentivizing consumers to overspend/overindulge on whatever product or service they are looking to buy. You will often see products sold with per/item costs dropping as you begin to buy multiples – ‘Buy one car wash for $5, or three for $12'. Despite three for $12 representing a better deal on a per/item cost basis, when presented with such offers the majority of consumers will simply purchase a single car wash.
A decoy option refers to an additional offer presented to the customers that is not intended to be purchased, but to highlight the savings when purchasing multiples – ‘Buy one car wash for $5, three for $15, or three for $12'.
Of course no one is going to buy the middle option when there is another which provides better value at a cheaper price. The question though, is whether or not more people would be inclined to buy the deal, than if the decoy wasn't presented at all.
So how effective was the decoy option when applied to multiple different crowdfunding campaigns? 28% of participants were swayed in to purchasing a higher-priced reward. That is significant, and can represent a substantial amount of funding that would normally go uncapitalized by the campaign issuers.
This study should be particularly interesting to companies hosting a crowdfunding campaign, as it was the first of its kind to test the efficacy of the decoy option within digital markets. While the number of consumers swayed in to spending more may not be as substantial in real life, the fact of the matter is that the majority of people do most of their shopping online, making the study quite relevant.
Iowa State University indicated that it based its findings after, “…researchers randomly assigned 4,000 participants to eight experiments based on reward-based crowdfunding campaigns, including one on Kickstarter with a real Swiss watchmaking company.”
Equity vs. Reward-Based Crowdfunding
It should be noted that there are differing kinds of crowdfunding platforms that should not be confused with one another. These include reward-based platforms, and equity-based platforms.
The aforementioned study was completed with one type in mind – reward-based crowdfunding. These platforms allow for start-ups to pitch their ideas for a product or service to prospective consumers. This is done in hopes that consumers will be swayed in to donating money that will provide the company with the capital required to bring its product/service to fruition. As compensation for their donation or ‘pledge', consumers are presented with various rewards that are typically a highly discounted offer on what it is the company plans on producing. The value of the reward is typically linked to the size of the donation received.
The key here is that any funding is viewed as a donation. There are no guarantees that the company will deliver on its promise, and there is nothing to protect consumers if it fails to do so. While this does not occur often, as crowdfunding platforms thoroughly vet projects before hosting them, it is a consideration that should be taken in to account for participating in such campaigns.
The following are a few examples of established reward-based crowdfunding platforms.
While these two may be the most popular reward-based crowdfunding platforms, hosting a campaign on either does not guarantee success.
As you can see, only ~40% of projects listed on KickStarter are successful in reaching their goals. Of those, ~66% raised under $10,000.
A decoy option is not a fix all solution. However, utilizing such techniques may be what is needed to push the 5,540 unsuccessful campaigns that raised between 81-99% of their goal over the finish line.
While reward-based crowdfunding has been around for a good while now, updated regulations have now allowed for the advent of equity-based crowdfunding. The main premise behind these platforms is much the same though – connect start-ups with a broad and deep pool of prospective clients.
The difference is that participants are not taking part in anticipation of a reward. Rather, they are purchasing actual equity within the company, making them investors as opposed to campaign contributors.
The following are a few examples of established platforms that offer/support regulated equity-crowdfunding campaigns, among other services.
Equity-based crowdfunding platforms have received a boost in recent years with the increasing popularity of digital securities. Successful examples of crowdfunding campaigns to leverage digital securities include companies like Exodus, INX, and more.
Based on the study discussed above, it seems clear that reward-based campaign issuers should definitely consider utilizing a decoy-option in their efforts.
This should be done not to mislead or dupe contributors, but to highlight/emphasize the value proposition of its more premium packages. Such an easy step can help generate significant capital, which may be the difference between a failed or successful campaign.