Of early birds and phantoms: how sold-out discounts impact entrepreneurial success in reward-based crowdfunding

Abstract

Reward-based crowdfunding platforms are a promising medium for entrepreneurs to raise funds from a large number of contributors. As a means to encourage contributions early in the life cycle of a crowdfunding campaign, entrepreneurs often choose to offer discounted rewards in limited numbers. Though previous research suggests that scarcity of rewards can increase the chances of success, it remains unclear whether these early bird offers continue to have an effect on the decision making of backers even when sold out, as they remain visible on the campaign’s webpage. Drawing on the theory of the phantom effect, this paper explores (1) how sold-out rewards influence backers’ selection of available options and (2) how the phantom effect may interact with different discount amounts. We conducted an online experiment with 229 subjects simulating the pledging process for a crowdfunding campaign that attempts to raise funds for the publication of a book. Our findings suggest that potential backers choose the undiscounted version of a reward more often, if a discounted, sold-out reward (phantom option) is displayed. This effect is significant when the phantom option has a high discount, but not significant when the phantom option has a low discount. Consequently, in contrast to the traditional perspective that sold-out options negatively impact sales, we suggest that, in reward-based crowdfunding, sold-out rewards may increase the chances of success, if considered and applied strategically. This study therefore offers counterintuitive implications for research as well as for entrepreneurs seeking funds through reward-based crowdfunding.