Felix Breuer's Blog

A Business Model for Crowdfunding Subscription Services

Fund I/O is a model for funding the production of any type of good with massive economies of scale. In its basic version, Fund I/O is intended to finance fixed costs that only apply once, such as the one-off cost of writing a book. (See here for an introduction.) However, many important goods and services incur fixed costs on a recurring basis. Examples include ongoing software development, research or journalism. These services require financing a staff of people to produce new software releases, white papers or articles on a continuing basis. However, once a given release/paper/article is produced, it can be distributed to an arbitrary number of people at a vanishingly small marginal cost. Thus the basic Fund I/O concept still applies.

A variant of Fund I/O that finances ongoing fixed costs is the following subscription model. Of course, each particular use-case will require further tweaks, but the basic model is this.

  • Each period creates new fixed costs. A period can be a time interval or a new release. An example would be \$5,000 every month.
  • Each customer submits a pledge for how much they would be willing to pay each period for access to the subscription. Let’s assume that on June 1st there are 100 people who submitted a pledge of \$50 or more, and a few more who pledged less than \$20.
  • The price is chosen as low as possible such that the costs are covered. Costs are distributed evenly among all subscribers who get access. In the example, the price would be set \$50 and the 100 people who pledged at least as much receive access for the current month of June.
  • As more subscribers sign up the costs drop. Say, another 100 people pledge at least \$25 by June 5th, then the price drops to \$25 and these 100 people receive access to the subscription for the month of June.
  • Previous subscribers are refunded the price difference. Each of the original 100 subscribers receive \$25. This can either be a cash refund or a credit that can be applied to the next months’ subscription fees.
  • Pledges remain active across periods. So if nobody changes their pledge, the subscription will cost exactly the same amount every month.

Just as in the case of one-off payments, the Fund I/O model has a number of advantages over classic subscription models.

  • Customers have an incentive to reveal their true valuation for the product.
  • The subscription is provided at the lowest possible price to the largest possible audience, while costs are covered.
  • Customers determine the price of the subscription through a transparent mechanism.

The subscription model described above can serve as a foundation for many different variants.

  • Rolling subscriptions can be incorporated into the pricing scheme. One customer can subscribe for June 1st till July 1st while another subscribes from June 5th till July 5th.
  • “Stretch-goals” can allow customers to determine the scope of the subscription through their pledges. If pledges are high enough to provide \$10,000 per month, another staff member can be hired, for example.
  • Periods can build on each other. Subscribers to version 1.0 of a software package can get refunds from sales of version 1.1, as the development work put into 1.0 clearly benefits 1.1.
  • And, of course, a share of the revenues can go to the producers as profit beyond the fixed costs for each month. These profits can serve as capital to provide funding for months with insufficient subscriptions.

Bottom line: Fund I/O is well-suited to subscription services. In the next post, I will go into detail on how this can be used to fund web services.