1/2: I need to set up a customer pre-order program. I'd like to take deposits on the full amount, and have the deposits be mostly refundable. I'd like to know what Kickstarter, Virgin Galactic, and Tesla do their pre-order programs, in terms of setting aside money in escrow or otherwise making customers feel sure that their money wasn't being spent on development and was truly refundable. (ignore "ideal response" section - included in 2/2)
All three of the reservation payments systems are distinct, demonstrative of the many options available regarding this topic. Tesla's reservation payment system includes the statement that the reservations are non-binding, with customer funds immediately transferred into the available cash of the company. Kickstarter operates differently, taking the role of neutral third-party protector of customer investments by holding the funding provided by customers in escrow until they are used to protect against scams. Similar to Tesla's policy, Virgin Galactic does not place reservation payments into escrow. Unlike the car company, they do state that payments are not utilized for project funding, and are kept separate instead.
Below you will find our overview of the reservation payment systems within Tesla, Kickstarter, and Virgin Galactic. The will include the ways each company made their customers feel secure that their money was recoverable.
Tesla's reservation payment agreement, the form a customer must sign and submit when attempting to make such a reservation, clearly states company policies. For example, the form indicates in item 2 not only that the payments are not held in escrow but that neither Tesla nor the customer is obligated to proceed with purchase, However, that does not mean that Tesla keeps the payment, which is fully refundable.
Tesla's reservation agreement does not provide the crucial information for customers on where their money goes. This could be attributed in large part to the lack of reassurance this information would provide to most consumers. According to arstechnica, Tesla's reservation payments serve an important, if risky, aspect of the company's financial plan. Tesla does not hold the money provided by consumers separate, instead depositing it directly in the company's accounts. Until Tesla delivers the promised cars, those payments are made to reserve are delivered, they are classified as deferred revenue. There is risk contained within the act of spending this cash because, as the company's form states, the customer is not obligated to proceed with purchase and their payment is fully refundable. However, this risk does not deter Tesla, a company with practice managing deferred revenue. In early 2016, Tesla had $1.15 billion in deferred revenue, and this amount has risen by design. In November 2017, Tesla unveiled an electric semi and a new roadster, all available to reserve, in a deliberate effort to obtain more capital.
One might expect the financial practices of Tesla would cause consumers to hesitate and perhaps reconsider prior to making a reservation payment. However, available evidence demonstrates this is not the case. People still line up for Tesla, such as with the newer Model 3, which received approximately 300,000 reservations. Within our sources, we isolated 2 reasons for the continued trust placed in Tesla.
1. They are open with their practices. The agreement consumers sign to reserve a Tesla is written accessibly. There is no fine print, no legal jargon, no traps for the unwary. When a company demonstrates they have nothing to hide, people may relax their guard.
2. Tesla has always operated this way. Arstechnica even states that financing operations with deferred revenue is "business as usual" for Tesla. Consumers could easily look at the level of innovation and excitement produced by Tesla and accept their business as usual as trustworthy for investment.
The manner of handling consumer investments by Kickstarter has almost nothing in common with Tesla's practices. The crowdfunding site provides a venue for startup and creators to directly interact with individuals interested in the project they offered. These consumers then become investors in that project through the service Kickstarter provides. As stated within the How Projects Work section of Kickstarter's website, Kickstarter is not a part of the contract between the creator and the consumer, and the creator is responsible for fulfillment of terms, not Kickstarter. This could leave the investors open to extreme risk, except Kickstarter, in their third-party role, places funds in escrow to ensure the consumers are protected in cases of fraud. For their services, Kickstarter receives 5%, Amazon receives 3-5% as the escrow service, and the rest goes to the creator. The consumer then gets whatever they initially agreed upon in their contract with the creator.
Securing the consumer's sense of safety in their investment did possess some similar techniques to those of Tesla.
1. They also made sure the consumer knew what they were reading. With their blue boxes interspersed throughout the legal speak and clauses, Kickstarter demonstrated a similar openness to that shown by Tesla.
2. They appear neutral by assuming the third-party role. Kickstarter appears more like a mediator than a business, building trust.
3. They use an escrow service, Amazon, a large successful company. The safety of escrow and the brand recognition held by Amazon are advantages for Kickstarter in building trust.
The least transparent of the three businesses within this overview is Virgin Galactic, at least regarding their reservation payment policies. After performing a comprehensive search, we were able to locate just one resource which concerns their reservation policies. The source, an article in The Daily Mail from 2014, is older than we would usually be willing to include, but no other option is available in the public domain. According to the Daily Mail article, Virgin Galactic does not place funds from ticket reservations in escrow. However, they do claim to keep those payments separate from the funds which support the project and its daily operations.
We were not able to find information which stated or suggested the specific methods Virgin Galactic uses to enhance the consumer's sense of safety. However, that Daily Mail piece did indicate that, whatever those techniques were, they were not successful. The article was written about the legal action underway in which 10 of the reserved passengers initially tried to transfer their money to escrow, but had the move blocked by Virgin Galactic. They eventually removed their funds, but lost the interest earned after 10 years in Virgin's accounts.
The three companies within the profile all take payments related to future products or services, but their manner of handling those payments are unique to each. Tesla utilizes the payments provided by consumers to grow their business, while Kickstarter acts as a neutral third party that keeps the money safely in escrow. Then there is Virgin Galactic, which claims to keep the funds separate, but offer no support for that statement.