Factory to Door Pricing - Limiting the Risk of Volatile Fulfillment Costs

Crowdfunding has a significant problem: cost volatility is sinking us - specifically costs involving shipping and fulfillment.

For many of us, we saw the first signs of the problem at the beginning of the pandemic with many successful game companies struggling due to the dramatic increase in freight (ocean shipping) prices.  We are seeing it again today with our industry struggling to stay afloat with the dramatic increase and unpredictability of American tariffs.  

Game publishers have very little control over the costs involved with getting their products from the manufacturers to backers, but bear most, if not all, of the risk associated with those volatile costs.

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Product delivery and its associated costs, are the single greatest source of risk a crowdfunder faces after funding their project.  They can, single handedly, sink a project, or even a whole company. 

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To understand this risk, let’s get into some relevant detail about the costs a publisher assumes when they produce and deliver their game.

Getting to the Root of the Problem

The costs of creating and delivering a crowdfunded game can be broken down into two general categories: production costs - the costs to produce the product itself; and fulfillment costs - the costs to transport and deliver that product to the backer.

While not every production cost is incurred before funding, we typically know how much the costs will be prior to launching our crowdfunding campaign.  And the more nebulous production costs, like royalties and labor, are paid out of whatever money remains after paying all expenses anyway.

But fulfillment costs tend to vary a lot.  Both the time of year and the destination country can have huge influences on them.  For instance, shipping late into the Christmas season can significantly increase “last mile” shipping costs - the costs to pay USPS or Fedex to deliver the package.  Additionally, sudden changes to a country's tax code, like with the recent US tariffs, can dramatically affect the cost of products shipped to that country.

However crowdfunding publishers rarely treat these highly variable costs with this degree of specificity.  In fact, the “shipping cost” backers are most familiar with are delivery or “last mile” shipping costs and taxes - see below.

That leaves a lot of potentially variable fulfillment costs like freight, customs, and tariffs that are generally paid for with a very static pledge collected a year earlier.

Let’s use an example to see just how much this can vary.  For this purpose, we will use my upcoming game, Zoo-ography Extended Edition.  Assume in each example we are shipping 1,000 games (5 pallets) to each the US and UK.  These would be the approximate fulfillment costs associated with each game sold (assuming I sold all 2,000).

Total Fulfillment Costs	UK	US
Freight	$0.98	$4.65
Freight Insurance	$0.45	$0.45
Customs Fees	$0.18	$3.44
Tariff	$0.00	$21.75
"Last Mile" Shipping	$10.36	$15.00
Taxes	$20.01	$6.52
Delivery Costs (per game)	$31.98	$51.81

Note how much the tariff increases the overall fulfillment cost.  Traditionally publishers pay for variable fulfillment costs like tariffs out of the pledge and do not charge them as part of shipping.  Why is that?

Landed Costs.

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Landed costs fit a retail model well, but exposes crowdfunders to tremendous risk. We need a new model.

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The retail model uses landed costs to determine MSRP and landed costs are made of costs from both production and fulfillment.  Typically they consist of the cost to make the game and to “land” it at the port of the destination country.  See the diagram below.

A multiplier is applied to the landed cost to get the MSRP - which is used to set the pledge price.  The advantage of using landed costs is that it ensures there is sufficient margin for retailers. 

The problem for crowdfunders is if any of these underlying landed costs abruptly change, we do not have a mechanism to adjust what we charge our backers - we must return to backers and beg for more money (since we’ve likely already collected shipping) or we are expected to simply eat the cost.

For example, in 2020 when freight costs suddenly jumped up to 4x the normal rate, many publishers were unable to recoup the cost.  I myself ate almost 20K in losses due to this unexpected and unavoidable price increase.  Many publishers are facing the same problem today with the US tariffs.

As a small publisher, since retail isn’t our primary concern (see Why Retail is a Trap), why behold ourselves to a model that clearly introduces significant risk for us?  We need a different model customized to the specific needs of crowdfunders.

Factory to Door Model

Factory to Door Pricing is a cost model I am proposing to limit the risks and impact of variable delivery costs.  (While I personally have never heard of anyone using this exact model, it is fully possible another is and that it already has a name, but until then, I’ll be referring to it as Factory to Door Model). 

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The premise is very simple.  The backer pays a pledge when they back the game, and the total fulfillment cost just before the game is delivered.

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The backer pledge is charged up front and covers costs involving your production (including crowdfunding and payment processing fees).

The backer fulfillment cost is charged just prior to delivery (usually in a pledge manager) and covers the costs to get the product from the factory to their door.

This keeps the static costs involved with production (and the value of our labor) tied to a static predictable amount - the backer pledge, and the backer only pays the cost of fulfillment that they themselves would incur for their home country.

Let’s look at some numbers to compare the old crowdfunding model with the new F2D model.

On the surface the two models are comparable in our net, but only factory to door pricing is built to handle increasing risk.

The two examples above contrast the two models.  For this example, I have NOT included the US Tariffs.  As you can see, the pledge price is the same on both.  However the fulfillment cost to the UK is slightly less than the old model (both of which include VAT) and the US is a little higher.  This is because freight, which is higher to the US, wasn’t previously included in the shipping price.

To equate the two models in terms of their total net (~84K), I added a $4 subsidy to the F2D Model.  Essentially this means the publisher is eating a flat $4 per order of the fulfillment costs.  This can be done to reduce fulfillment cost sticker shock or maintain your MSRP (if you want to go to retail) though I generally don’t recommend them for reasons I’ll explain later.

Conceivably a publisher could use a F2D Model and wouldn’t appear much different to the backer.  So why use it? 

Oh no!  A wild 145% tariff appears in the US!!!

The tariff takes a huge bite out of our net if we aren't using factory to door pricing for fulfillment.

As you can see from this example, using the old model, that same tariff would eat over 22K from your net.  That’s the money you use to pay the designer, yourself, and your other expenses.  However, in the F2D model, because you set expectations with backers that you wouldn’t charge for fulfillment costs until it was time to ship, and that they would pay exactly what was required to deliver the product, the US backers pick up the other $20 in costs.

If you believed this sticker shock would ultimately upset US backers, feel free to apply a subsidy.  You can do this at any time because it's money you are choosing to lose from the pledge money you already received to reduce the F2D fulfillment cost.  In this example below, I added a $15 subsidy to all orders just to show the changes to equate the net between the two models.

We can use a fulfillment subsidy to reduce sticker shock.

Subsidies aren’t preferable though unless you need them.  Let’s say that instead of a subsidy, you instead reduced your pledge price by the same amount ($15) from the beginning.  The chart below shows this difference. 

When we exchange a subsidy for an equally reduced pledge instead, we net more money.

Both examples are the F2D model, but the top has the subsidy and the bottom lowers the pledge.  This fiscal change would increase your net by $1.50 per backer due to the fact that several costs are based on your pledge amount - which is now lower.  Note though that even with the reduced price to $64, US backers might balk at a $50 fulfillment cost.  Subsidies can be useful to help assuage backer expectations given how little visibility they’ve had into understanding the true cost to provide their games to them.

In the end, the Factory to Door model minimizes the risk for publishers to be forced to bear unexpected costs.  And generally publishers would agree that it’s unfair to have to eat the extra fulfillments costs - we are in the game making business after all, not the shipping business.  But by that logic, we also shouldn't be benefiting by getting additional profits from backers in countries with cheaper delivery. 

The Factory to Door Model removes the risk and the incentive to profit from shipping.  Everyone pays only their own costs.

Change is Hard but Necessary

As a cozy crowdfunder I generally try to minimize risk, and these unpredictable fulfillment costs represent the single greatest risk after funding.

I cannot say if F2D pricing is the final answer.  Adjusting to this model will create new challenges.  Messaging to backers will be critical for example. But solving those problems should present less risk than continuing what we’ve been doing.  Breaking free of MSRP, introducing transparent costs of fulfillment, and building the value of our labor into a more resilient pricing structure also presents wonderful opportunities for sweeping changes in how we do business.

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We need to be willing to evolve our understanding of crowdfunding and adjust to its ever changing environment. 

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Crowdfunding isn’t a retail model and shouldn’t be based around conforming to it.  We should recognize the unique role it plays in creating new products to share with others.  It doesn’t need to be organized around capitalism, maximizing shareholder value, or even profit. It allows us to simply create things for people who want them.  

Change can be hard, but our options are to change or risk repeating the same mistakes.