Unseen Costs of Kickstarter: The VAT Dilemma

The most overlooked and costly part when you running a project.

Echy Wong

December 4, 2023

Before delving too deep into the intricacies of VAT, let's establish a crucial aspect of Kickstarter projects that often go unnoticed by backers but weighs heavily on creators: the distinction between known and unknown costs.

Kickstarter offers creators a significant advantage – upfront capital to bring their projects to life. However, there's a catch: accurately predicting the final costs of goods sold. Unlike traditional businesses, Kickstarter projects lack the luxury of adjusting prices based on the complete development and manufacturing costs. Once prices are set and funds are received, there's no room for adjustments.

Here's a breakdown of variable costs that must be considered when setting prices for a new Kickstarter:

  • Mass manufacturing per unit costs
  • Freight shipping
  • Fulfillment shipping
  • Additional development (art, design, etc., if needed)

While the variability in each aspect may not be excessively large, even a slight shift of 5 or 10% in multiple areas can result in significantly misjudged pricing.

VAT – A Predictable Yet Unavoidable Cost

One of the few costs that can be accurately determined in advance is Value-Added Tax (VAT). The European Union and most non-EU European countries impose a 19% VAT on goods sold, whether from domestic or foreign sellers. This tax is obligatory for all goods sold into the EU, regardless of their origin or the seller's location.

Similar to retail or sales tax in the US, VAT is ostensibly paid by the end consumer but is reported and paid to the government by the seller. Although the VAT technically has a range, hovering around 20%, we set it at 19% on Kickstarter.

Why Don't All Kickstarters Charge for VAT?

While some may not explicitly show VAT charges, they are likely paying it to European governments for all backers within Europe. The challenge arises in how these creators handle VAT within the overall cost of goods sold.

The VAT percentage is assessed on the total sale value of the goods, including shipping costs. This means that a $100 product sold in Europe requires a $20 payment to the EU government, leaving the creator with only $80 from the sale.

Strategies for Handling VAT

Possibility 1: Subsidizing Costs

Some creators may spread the VAT through a combination of sale and/or shipping prices, essentially subsidizing costs for backers in different regions. However, this method poses fairness issues and relies on accurate predictions of backers from each country.

Possibility 2: Accepting a Smaller Margin

Creators might opt to accept a 20% smaller margin from all European customers without adjusting prices elsewhere. This approach, though, is deemed unlikely, as it would mean losing money on each European backer.

The Pitfalls of Subsidizing Costs

While some creators may opt for the subsidy route, it raises two significant concerns. First, it introduces an element of unfairness, as customers in different locations end up paying the same total price despite the varying costs involved in selling the product. Economic principles like "purchasing power parity" underscore the inherent differences in costs across regions. Asking backers in one country to subsidize the VAT of another doesn't align with fair market practices.

Secondly, this subsidy model assumes an ability to foresee the future – precisely predicting the distribution of backers from each country. In a hypothetical scenario with unequal backing from the US and the EU, the subsidy mechanism could lead to overcharging one group and undercharging the other, creating a financial imbalance for the creator.

Accepting a Smaller Margin: Plausible but Improbable

The second possibility involves Kickstarter creators willingly accepting a 20% smaller margin from European customers without compensating elsewhere. However, this approach is considered highly unlikely. Most products don't boast a 20% margin to begin with, and willingly losing money on each European backer suggests a lack of thorough financial analysis rather than a deliberate choice.

In essence, creators facing the VAT dilemma might find themselves in a precarious position. Balancing the needs of backers from different regions, predicting demand accurately, and ensuring fair pricing are complex challenges that require a delicate approach.

The Impact on Kickstarter Creators

For Kickstarter creators, grappling with these challenges is part of the larger puzzle of running a successful campaign. It emphasizes the importance of thorough financial planning, realistic pricing strategies, and transparent communication with backers. While the VAT dilemma is just one facet of the crowdfunding landscape, it underscores the intricacies that creators navigate behind the scenes to bring their projects to fruition.

Transparency and Communication

In the face of these challenges, transparency becomes a cornerstone of successful Kickstarter campaigns. Communicating openly with backers about the intricacies of VAT, the associated costs, and the chosen pricing strategy builds trust and understanding. Kickstarter creators who take the time to educate their backers on these financial realities foster a stronger connection and support system.

Mitigating Risks Through Planning

To navigate the uncertainties of VAT and other variable costs, meticulous planning is paramount. Kickstarter creators should conduct thorough financial analyses, factoring in potential shifts in manufacturing, shipping, and development costs. While it's impossible to predict every variable, a well-prepared creator is better equipped to adapt and manage unforeseen challenges.

Collaborative Solutions

Creators might also explore collaborative solutions within the Kickstarter community. Sharing insights and best practices on handling VAT-related issues can benefit both experienced and first-time campaigners. Platforms like Kickstarter can facilitate discussions and provide a space for creators to exchange valuable information, ultimately contributing to a more informed and resilient crowdfunding ecosystem.

Beyond VAT: The Broader Funding Landscape

While VAT is a significant consideration, Kickstarter creators should also broaden their perspective to the larger funding landscape. Exploring alternative funding models, such as pre-orders, partnerships, or supplementary campaigns, can provide additional avenues for financial support. Diversifying funding sources helps creators better navigate the challenges posed by variable costs and ensures a more sustainable approach to project development.

The Evolving Nature of Crowdfunding

As crowdfunding continues to evolve, so do the strategies employed by creators to address financial complexities. The VAT dilemma serves as a microcosm of the broader challenges faced by those seeking to bring innovative ideas to life through crowdfunding. Adaptability, transparency, and a proactive approach to financial planning are essential components for Kickstarter creators striving to not only survive but thrive in this dynamic landscape.