Critical mass and campaign success: a behavioral model of reward based crowdfunding

Abstract

We propose a behavioral model to explain the bimodal pattern observed in reward-based crowdfunding: most campaigns either fail with almost no funds raised or succeed by a small margin. A sophisticated entrepreneur aims to maximize the campaign’s success probability while facing boundedly rational buyers, whose decisions follow a meaningful behavioral rule shaped by network externalities and time effects. While dedicated buyers (e.g., friends and family) always pledge if the price does not exceed their valuation, common buyers with positive hassle costs only pledge when the campaign’s perceived success probability is high. The model shows that campaign success hinges on reaching an endogeneously determined critical mass early, which triggers a pledging cascade, with the bimodal funding outcomes neatly predicted by the closed-form solution. Beyond replicating the bimodal pattern, the model yields economic and managerial insights. First, failure risks may render demand-wise market viable products unable to launch on crowdfunding platforms. Also, the model suggests that the entrepreneur should adopt a volume strategy (pricing low) rather than a margin strategy (pricing high) to accelerate early-stage fundraising and reach the critical mass. Early contributions from friends and family are shown to be more effective than when used as last-minute support. Lastly, early-bird pricing can enhance the campaign’s success probability only if it is appropriately designed.