If your project is one of the (many) that don't pan out, the best advice is to pull the plug as soon as you can. Refund whatever portion of the backers' money you haven't spent, perhaps with a make-good apology reward for their trouble. (Imagine a bumper sticker: "I invested in Bob's Widgets and all I got was this lousy sticker.") The last thing you want is to be sued by hundreds of people for $50 each. In reality, reports of refunds are rare. If you actually offer one, you'll be in a very tiny minority.
If you finished building it, but your project isn't viable or the product doesn't work, should you ship it? Ask your backers if they still want your expensive paperweight. As with most things, clear and copious communication with your backers goes an awfully long way to smoothing over bad feelings. Most Kickstarter backers know that nothing is guaranteed, but they absolutely despise radio silence.
Kevin Murray, a frequent Kickstarter backer, puts it this way: "For me, the lack of truthfulness and transparency is what leaves a bad taste. Share the struggle, ask for advice, and an investor may be understanding. Go dark, and people will believe the worst."