Operational analysis of crowdfunding on business: A perspective of product competition

Abstract

With the emergency expansion of applying crowdfunding as a marketing tool for financing, a creative product, crowdfunding has been treated as a marketing-operations interface model to develop new products. However, the broad questions of whether and how the characteristics of crowdfunding affect product development strategies in the post-funding market have received limited attention in prior literature. In this paper, going beyond the fundraising phase, we propose a product competition model on product quality and price in the post-funding market when crowdfunding is seen as the demand learning tool to update the demand information. By analyzing the interaction between the crowdfunding-related characteristics and the post-funding market, we not only focus on the profit, but also decompose the effects of crowdfunding into profit inflows, demand learning, and price discrimination. The analytical results show that: (i) The competitive advantage in the crowdfunding stage benefits firms since the revealed information about the dominant product quality may increase consumers' willingness to pay. (ii) The effects of price discrimination on the optimal decisions about product quality and price depend on backers'/consumers' type. (iii) AoN mechanism is preferred use for blockbuster-potential products and KiA mechanism is preferred use for long-tail products. The model provides a theoretical underpinning for the recent observation that crowdfunding is seen as a marketing tool for some big firm in the process of developing new product. Our results complement earlier studies in Business Analysis by demonstrating the marketing-operations interface effect of crowdfunding.