What Are The Key Drivers Of Consumer Preference For Crowdfunded Products?

Author(s)

Oguz A. Acar, Darren Dahl, Christoph Fuchs, Martin Schreier

Abstract

Crowdfunding has emerged as an alternative means of financing new ventures. In this research, we ask whether and why having been crowdfunded carries any signal value for the broader market of observing consumers. Eight studies reveal that consumers demonstrate a preference for crowdfunded products over differently funded ones. Crowdfunding is increasingly used as an alternative means of financing new ventures. Instead of asking venture capitalists, banks, or other professional financial service providers to invest in one's ideas, crowdfunding involves pitching those ideas directly to the general public, the potential customers of the resulting new product (Belleflamme, Lambert, and Schwienbacher 2014; Kuppuswamy and Bayus 2018; Mollick 2014). And this audience seems to be willing to invest: At Kickstarter, one of the leading crowdfunding platforms, about fifteen million individuals have been reported to have helped finance more than 146,000 projects since its launch in 2009 (Kickstarter 2018). More generally, crowdfunding platforms across the globe helped raise more than $30 billion in 2015 (Zvilichovsky, Danziger, and Steinhart 2018), a figure the World Bank estimated to triple by 2025 (WorldBank 2013). The rise of crowdfunding in practice has sparked strong interest among scholars across disciplines such as finance, entrepreneurship, strategy, and marketing. Much of the recent attention has been dedicated to a better understanding of the consumers' motivations to participate in crowdfunding (e.g., Boudreau et al. 2015; Gerber, Hui, and Kuo 2012; Kuppuswamy and Bayus 2017; Ordanini et al. 2011; Zvilichovsky, Danziger, and Steinhart 2018), and the dynamics and success factors of the crowdfunding process (e.g., Agrawal, Catalini, and Goldfarb 2015; Burtch, Ghose, and Wattal 2013; Greenberg and Mollick 2017; Mollick 2014). In this paper, we build on this initial research and address the novel question of how crowdfunding is interpreted by the broader consumer market. Specifically, we ask whether non-involved consumers, that is, the entire market of a firm's potential future customers, differentially react to products as a function of the underlying product's venture funding history. On the one hand, crowdfunding has been portrayed as the last chance effort to bring a product to market (e.g., Belleflamme, Lambert, and Shwienbacher 2014; Brown, Boon, and Pitt 2017; Kuppuswamy and Bayus 2017). Financial analysts and conventional investors often interpret crowdfunding as a negative signal to the marketplace with respect to new product success (Carlozo 2017). On the other hand, we posit in this paper that firms will gain advantage by signaling that their product is crowdfunded. Similar to the enthusiasm identified in the investment decision for crowdfunded products, we contend that consumers will show a distinct interest in buying these types of products. In Study 1, we test whether consumers prefer a crowdfunded product over alternatives using different experimental designs, manipulations, dependent variables, product contexts, and samples. Study 1A (n = 1,512, Mage = 31 years, 44% female, Prolific) examines whether consumers prefer a product that is described as crowdfunded compared to a baseline condition, which did not mention any funding source details, using an incentive compatible willingness to pay measure (a variant of the BDM procedure: Becker, DeGroot, and Marschak, 1964) as the dependent variable and digital notebooks as the product category. In the crowdfunding condition, we discreetly implemented our manipulation using a statement about crowdfunding located as text above the product (which reads as follows Crowdfunded: The People spoke and put their money behind their words. Each of these products got its start as a successful crowdfunding campaign). In the baseline condition there was no respective information present. To maximize external validity, we took the crowdfunding signal from a real shopping website, Thegrommet.com, a website that sells crowdfunded products (including the ones shown to our study participants). The results show a strong crowdfunding effect: participants are willing to pay about 21% more when the product was described as being crowdfunded compared to when no funding source information was present (Mcrowdfunding =8.57, Mbaseline = 7.11; Fl, 1510 = 14.81,72 < .001, d = .20). In a follow-up study (Study 1B: n = 100, Mage = 38 years, 35% female, Prolific), we replicate our focal effect using a more classic dependent variable, purchase intent, and, per consequence, by also including price information in the stimuli. An ANOVA on the purchase intention measure demonstrates that participants exhibit higher purchase intentions when the product was described as being crowdfunded (M= 4.15) compared to when no funding source information was provided (M = 3.33; F1,98 = 5.17, p = .025, d=0.46). Study 1C and ID employed a direct comparison design following the recommendations of Meyvis and van Osselaer (2017). That is, participants were presented with two different products side by side with the only difference between conditions being the information regarding our independent variable - the funding source of the product. In Study 1C (n = 390, Mage = 20.44, 51% female, students), participants were introduced to two start-ups labeled Start-up A and Start-up B; one of which was described as having used crowdfunding whereas the other one as having used venture capital funding. Half of the participants were exposed to a condition in which Start-up A was described as crowdfunded and the backpack of Start-up B as venture capital funded; the other half was assigned to a condition where the backpack of Start-up A was described as venture capital funded and the backpack of Start-up B as crowdfunded. Product choice, our dependent variable, was captured by asking participants to indicate which of the two backpacks they would prefer. A logistic regression with actual product choice as the dependent variable and funding source as the independent variable demonstrates that consumers have a significantly stronger preference for the backpack when it is described as crowdfunded (χ2 = 6.47, b = .52, SE =.20, p = .011). For both backpacks, choice share for the crowdfunded alternative was higher than the venture capital funded alternative: 54% (backpack A) and 59% (backpack B). In a follow-up study (Study 1D), we replicate the crowdfunding effect in another product category (cameras), using a relative preference measure as dependent variable (7- point scale), based on a different study population (MTurk, n = 302, Mage = 37, 57% female, MTurk), and, importantly, against a series of different control conditions (i.e., three alternative funding sources: venture capital, bank loan, or self-financing) to address the possibility that (nega- tive) attitudes towards venture capitalists might, at least in part, have driven the effect obtained in Study 1C. When the Start-up B's camera was described as crowdfunded, participants reported a significantly stronger preference for it (M = 4.42) than when it was described as funded by venture capital, a bank loan, or self-financing (M = 3.50; F1, 296 = 15.37, p < .001, d = .45). Critically, the 2(product flip) x 3 (alternative funding source) interaction proved insignificant (p > .20), suggesting that the focal crowdfunding effect emerges strongly when pitted against all three control conditions. In Study 2, we use in-depth interviews (28 in-depth interviews with informants from different backgrounds and socio-demographics; age range from 23 to 83 years, 11 female) as an exploratory approach to better understand what inferences consumers are making from the crowdsourcing signal, and seeing how these inferences are likely to motivate preferences for crowdfunded products. The qualitative study reveals that the crowdfunding effect we identify is driven by distinct inferences involving the quality of the crowdfunded product, the underdog status that often underlies crowdfunded firms, and the ability to bring equality to the marketplace by providing opportunity to crowdfunding initiatives. In Study 3, we formally test these mediators using a direct comparison design. Participants (n = 200, Mage = 39 years, 49% female, Prolific) were presented two cameras side by side - Luna and MySight - together with various product-related information that consumers are typically exposed to while shopping. They were randomly assigned to one of the two conditions (product Luna was described as being crowdfunded and the product MySight as being venture capital funded or vice versa). Everything else was identical between the two conditions. Purchase intention, the dependent variable, and the mediators were also captured using 3-item scales (as ranged between .90 to .94). Participants demonstrate a significantly stronger purchase intention for the camera MySight when it was described as crowdfunded (M = 4.47) compared to when it was described as venture capital funded (M = 3.36; Fl ,198= 30.42, p < .001, d = .78). A similar pattern of effects is obtained for each of the three process measures. First, perceived quality of MySight was significantly higher when it was described as crowdfunded (TH= 4.31) compared to when it was described as venture capital funded (M = 3.80; Fl, 198= 6.95, p = .009, d = .38). Second, participants perceived the start-up that developed MySight significantly more strongly as an underdog when it was described as crowdfunded (M = 5.11) compared to when it was described as venture capital funded (M = 2.99; F1,198 = 151.97, p < .001, d = 1.75). Finally, participants felt significantly more strongly that purchasing MySight will reduce inequality in the marketplace when it was described as crowdfunded (M = 4.96) compared to when it was described as venture capital funded (M= 2.95; Fl,198= 131.64, p < .001, d = 1.62). The results of mediation model using bootstrapping procedures (Hayes 2013) reveal that each of the three mediators (tested in isolation) yields a significant indirect effect of funding source on purchase intention (95% confidence intervals for perceived product quality [CI95%] = .09, .62; perceived underdog status [CI95%] = .04, 1.07; one's motivation to help reduce inequality in the market [CI95%] = .88, 1.52). In our final two studies (4A and 4B), we focus on the equality mechanism by measuring and manipulating consumers' general preference for inequality, respectively, and testing whether this preference moderates the crowdfunding effect. In Study 4A (TV = 305, THage = 35 years, 48% female, MTurk), we again used direct comparison design (similar to Study ID). We operationalize differences in preference for social inequality using social dominance orientation, which is conceptualized as an individual-level difference measure that represents preference for group-based dominance hierarchies in which dominant groups oppress subordinate groups (Ho et al. 2015; Jost et al. 2003; Pratto et al. 1994). Product preference on a 7-point item served as our dependent variable. We ran a hierarchical regression analysis with product preference as dependent variable, and preference for social inequality measure, dummy-coded funding source (0 = Start-up A crowdfunded and Start-up B venture capital funded, 1 = Start-up B crowdfunded and Start-up A venture capital funded), as well as the respective interaction term as the independent variables. Results reveal a significant main effect; participants indicated a stronger preference for the product of Start-up B when it was described as crowdfunded (b = .86, SE = .21, p < .001). As predicted, the analysis further revealed a significant interaction effect between funding source and preference for social inequality (b = -.40, SE =. 16, p = .012), indicating that the preference for crowdfunded products is stronger for participants who are less accepting of social inequality. Indeed, a floodlight analysis, using the JohnsonNeyman technique (Hayes 2013), shows that the crowdfunding effect is only significant for participants who score low on the social dominance orientation scale (i.e., lower than or equal to 3.32). For participants who score higher on social dominance orientation, however, the crowdfunding effect was not significant (and, interestingly, directionally negative). In Study 4B, we used a priming paradigm to manipulate preference for social equality. Participants (N = 406, vHage = 36 years, 44% female, MTurk) were randomly assigned to conditions in a 2(funding source: Startup A crowdfunded and Start-up B venture capital funded, or vice versa) x 2(acceptance of social inequality: high vs. low) betweensubjects design experiment. They were asked to carefully read one of two different versions of an ostensible New York Times article which was designed to prime high versus low acceptance and support of social inequality, participants demonstrated a significantly stronger preference for the product of Start-up B when it was described as crowdfunded (TH = 4.59) compared to when it was described as venture capital funded (TH = 3.64; Fl ,332 = 20.77, p < .001, d = .48). Whereas the effect of the acceptance of social inequality factor on product preference was not significant (F1,332 = .75, p = .39, d = .07), we found, most critically, a significant interaction effect (F1,332 = 5.79, p = .017). In line with the equality mechanism, we found a positive and significant crowdfunding effect in the low acceptance of social inequality condition (Mstart-up B crowdfunded = 4.75, Mstart-up B venture capital funded = 3.26; F1,332 = 23.38, p < .001, d = .77). This effect, however, was not significant in the high acceptance of social inequality condition (THstart-up B crowdfunded = 4.42, Mstart-up B venture capital funded = 3.96; F1,332 = 2.39,p = .123, d=.23). Our study has several contributions. First, we clarify the signal that crowdfunding provides to the broader consumer market by demonstrating that having been crowdfunded can help differentiate products and ultimately increase demand for such products in the marketplace. Importantly, this effect materializes even after having controlled for a product's objective functional characteristics. Second, we explore the underlying causal reasons for this effect, finding three drivers that underlie consumer's preferences for crowdfunded products. Specifically, we see inferences regarding the quality of crowdfunded products, the underdog status underlying these products, and the ability of crowdfunding to drive out inequality in the marketplace motivate consumers to respond to this signaling. Third, we provide added insight to the inequality account by showing how robust this motivation is - i.e., defining it both through experimental manipulation and as a chronic trait belief of the consumer. This identification broadens our understanding of where individuals see inequality by moving beyond race, gender, nationality, etc. to identify inequality in the marketplace as an important motivator in consumption. Indeed, our work shows that consumers will not only support activities that reduce social inequality among different kinds of people, but also in their consumption behaviors. From a substantive standpoint, our findings highlight that under certain conditions start-ups and retailers alike might use "crowdfunded" as a differentiating attribute at the point of sale. Because it is currently a rarity to see crowdfunded labelling in the marketplace, we believe this finding provides a disruptive spark not only for crowdfunding thought but also for crowdfunding practice.

Organisation(s)

External organisation(s)

University of London, University of British Columbia (UBC), Technische Universität München, Wirtschaftsuniversität Wien (WU)

Journal

Advances in Consumer Research

Volume

48

Pages

183-185

No. of pages

3

ISSN

0098-9258

Publication date

2020

Peer reviewed

Yes

Austrian Fields of Science 2012

502019 Marketing

Keywords

Portal url

https://ucrisportal.univie.ac.at/en/publications/b8ca7d81-a9b9-4d5b-af14-917fb923058d