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How Pebble made money by staying on Kickstarter

How Pebble made money by staying on Kickstarter

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If you were premiering an exclusive, heavily anticipated gadget, why would you do it on Kickstarter? It's been a much-asked question since this morning when Pebble did just that, dropping their new Pebble Time onto Kickstarter. For now, it's the only place you can order the watch. There was even a $40 discount for anyone who got their order in early. But why?

There's the sentimental angle: Pebble started out on Kickstarter, and their strongest supporters are still Kickstarter backers who bought in early. Then there's that meta-sentimental offshoot, the PR angle: as long as they're on Kickstarter, they look like the scrappy underdogs, set to do battle with the juggernaut Apple Watch this summer. But the real answer may be even simpler: money. Pebble simply makes more money selling watches on Kickstarter than anywhere else except its own web store. The company gets the money faster, and it gets to keep more of the retail price. In fact, it's not even close.

The company gets the money faster, and it gets to keep more of the retail price

The first thing to consider is the margin. Under the current set-up, Pebble is giving up as much as 10 cents on every dollar it brings in: Kickstarter takes 5 percent, and payment processor Stripe takes between 3 and 5 percent for processing the money. There are smaller margins out there (Etsy, for instance, has whittled the margin down to 3 percent), but it's hard to do much better, particularly on the processor fee.

More importantly, it's worlds better than conventional retail. Sell the same watch at Best Buy, for instance, and the default margin would be closer to 50 percent. A fantastic negotiator might be able to whittle it down to 35, but it's unlikely — and for obvious reasons. Best Buy has rent to pay and floor managers to feed, all of which cuts into Pebble's bottom line.

Then there's conventional e-commerce sites like Amazon. Amazon doesn't have rent or retail employees, although the margins tend to be competitive with conventional retailers. The bigger issue is when they pay, rather than how much. Amazon would need the watches upfront, but Pebble wouldn't get its money until two or even three months after the first round of sales. That makes it impossible to use pre-orders as startup capital — a problem that self-run crowdfunding campaigns also run into. Even Pebble’s own web store can't raise funds off pre-orders. Outside of Kickstarter's fundraising model, those upfront terms are hard to come by.

Even Pebble’s own web store can't raise funds off pre-orders

That's particularly an issue for Pebble. This kind of hardware is expensive to produce, and the company isn't planning to ship anything until May. Pebble has already raised more than 6 million dollars on the project, with millions more still to come, and having that money in March instead of July makes a big difference. After raising $26 million in outside funding, the company isn't exactly strapped for cash — but when you're juggling this many models and this many orders, every million counts. If Pebble thinks up a great new product after the Apple Watch comes out this summer, that Kickstarter money could be the difference between rushing out a new model and waiting for the next fundraising round.

There’s a limit to this model. $6 million seems like a lot of sales, but it’s coming from a small group of buyers — less than 30,000, as of press time. It’s just a fraction of the world’s smartwatch buyers, but to reach the rest of them, Pebble will have to go through the usual retail channels. A lot of the world just isn’t ready to buy electronics on Kickstarter. Many of them don’t even know the site exists. They might be interested in the Pebble Time, but they’ll wait until they can get it on Amazon or see it on the shelf at Best Buy. If Pebble is going to compete with Apple, the company needs to reach everyone, which means going through every channel. But until then, it can drum up a lot of money by staying inside the crowdfunding bubble.