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Five Ways Crowdfunding Makes Market Research Obsolete

Arguably more powerful than the capability to raise capital or generate early orders is crowdfunding’s ability to accomplish five things.

Crowdfunding is booming—its overall market size is anticipated to reach $500 million by the end of 2012, with growth fueled by the JOBS Act taking force in January 2013. This legislation will expand campaign “perks” received in exchange for individual donations to include equity ownership in startup businesses. Extreme crowdfunding success stories like Pebble—which exceeded its funding goal to raise $10.3 million in wristwatch pre-sales on Kickstarter—have stoked the hope of entrepreneurs and has democratized the funding of ideas.

But even more powerful than the ability to raise massive capital in a flash or generate a surge of early orders is crowdfunding’s ability to:

1) Accurately assess demand

2) Generate engagement prior to launch

3) Create brand advocates who assist ongoing development

4) Invite strategic partnership and acquisition opportunities

5) Lower costs and, in turn, mitigate risk

Why spend thousands of dollars on custom surveys to gauge purchase interest when you can do the same at virtually no cost? In the future, crowdfunding will likely be seen as a viable solution not only for creative projects, causes and aspiring entrepreneurs, but also for established small-to-medium-sized companies seeking an alternative to traditional market research.

The U.S. market research services industry includes 4,800 companies with combined annual revenue of about $17 billion. I have spent over a decade working in this sector, first on the vendor side conducting focus groups and quantitative studies for a variety of technology, consumer packaged goods, retail, and automotive companies. I then managed research at Vivendi Universal Games, Activision, and Yahoo! before going back to graduate school for an MBA is sustainable management.

Now, as a first-time entrepreneur of a tech startup called AMP—a collaborative bookmarking site and file exchange for sustainability champions—launching a crowdfunding campaign on Indiegogo to kickstart our efforts was the obvious choice. In addition to the five reasons mentioned above, crowdfunding is a way for us to entice developer talent and gain leverage to secure additional investment and resources needed to scale growth.

Large companies will likely continue spending huge sums of money on traditional market research and product development, but crowdfunding offers a compelling alternative for small-to-medium-sized businesses with budgetary constraints. Beyond the up-front investment needed to identify what will be tested, and the development of supporting campaign materials (AMP’s video cost about $5,000), crowdfunding is virtually free. It reduces risk by allowing consumers to determine the viability of proposed products and services before development. The influx of small-to-medium sized business investment received directly from consumers, whether they’re new or existing companies, will stimulate the economy and create needed jobs by helping businesses with strong ideas grow and flourish.

Staying engaged with those who helped develop your product or service, and thus creating brand advocates, is a marketer’s dream come true. Not to mention the benefits of having quantitative data to inform accurate sales forecasts. In some ways, this approach isn’t new, as iTunes, Amazon, and video game publishers, to name a few, have been using a pre-sale strategy for years. Instead this would simply move the purchase decision up in the development cycle, further decreasing risk.

Established companies could also use crowdfunding platforms to identify acquisition opportunities, following the money to identify business ideas generating the most enthusiasm. Granted, some policing will be required to ensure established businesses don’t monopolize or misuse a crowdfunding platform, but it strikes me as an obvious evolution in market research methodologies, aimed at accurate demand assessment, customer relationship management and brand loyalty generation.

What do you think? Do you see other opportunities and risks for crowdfunding moving forward?

Photo via Flickr (cc) user JMR Photography.

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