Thoughts on Patreon’s (rolled-back) fee change

Update, morning of December 13: Patreon has rolled back this announced fee change, which they clearly waited to do until I’d posted this. More seriously, I think a lot of the business dynamics I’ve talked about here with respect to the kind of creators Patreon needs to court in the future still hold true—and are still worth thinking about.

In case you missed this particular part of the internet catching on fire the other day, Patreon—a platform designed to allow content creators to get direct support from their fans, via pledges paid monthly or “per work”—has announced a change to their fee structure. Instead of taking 5% and a sliding (and opaque) transaction processing surcharge of 2–10% from money going to creators, they’ll take a flat 5% from creators and add a transaction processing surcharge of 35¢ plus 2.9% to pledges.

You’ve probably seen the reaction on Twitter and other social media: that this change will cause too many patrons to leave and will devastate creators’ incomes and everything will end in ash and fire. The community does not, as a whole, appear to be pleased, is what I’m saying.

Why make this change?

First off, I don’t think this is was a cash grab by Patreon. The description of how the new fees work clarifies they’re going to stop “bundling” pledge charges together in one charge per month; this is not a sneaky way to pocket new transaction fees two through N if you’re supporting N creators. (I’ve seen people nitpick the specific numbers Patreon announced, but they use at least two different back-end processors with differing fees. It’s unlikely Patreon’s making money off this.)

Okay, but what about that marketing weasel guest post from June that everybody linked to? “We’d rather have our (Patreon’s) GMV be made up of fewer, but truly life-changed creators rather than a lot of creators making a few dollars.” (“GMV” is “gross merchandise volume.”) You can definitely read that as “screw the little guys.”

But should you? The argument is that creators need to have “an established online following, even if small” before launching a Patreon, and that it’s in Patreon’s best interest to focus on creators who meet that metric. This may sound brutal, but there’s truth to it. Also, remember Patreon makes the bulk of their revenue from aggregating across the “long tail”; I think the proper translation from Marketing Weasel here is “focus on the head and the tail will follow.”

Having said all this, let me put an asterisk beside “Patreon isn’t blowing off small creators.” I’m coming back to it at the end.

So they made wanted this change because…

This year Patreon’s on track to make around $7.5M, according to an article about how they closed a $60M funding round in mid-September. That sounds like a lot, but as an 80-ish person company (in San Francisco!) that probably doesn’t cover their labor costs, much less anything else. They’re taking venture capital money because they need it.

Now, VC money comes with…strings. As I write this, I’m unemployed in part because my last employer’s investment round came with a demand for them to cut headcount, and I was one of the lucky ones. (Yay!) We don’t know what strings were attached to Patreon’s last investment round, but we know that it valued the company at a boggling $450M. Given that the investors would like to see a payout in five or six years rather than thirty or more, Patreon is going to have to change somehow. I’d bet this change connects back to this investment.

Why? Well, as Christie Koehler argued, Patreon may want to get out of the micropayments business. I’m not positive she has all the details right (for instance, payments Patreon processes with Stripe are likely covered by Stripe’s “money transmitter” license), but I suspect the gist of her argument is on point.

At first glance this seems baffling. A lot of people flocked to Patreon because it was the only company with a micro-transaction model! Well, yes, because nobody else could make it work. It’s possible that at the end of the day, Patreon can’t make it work, either. Bottom line: I think Patreon’s most recent round of investment came with a requirement that they move to this billing model. (Update: I still think this is what the investors wanted.)

This doesn’t materially change Patreon’s revenue, though, so how are they going to earn that $450M valuation in five to ten years? Can they do that just by growing the number of creators? Well—maybe. Assuming they don’t change the business model, they just need to increase the number of creators and patrons they have. But it’ll really, really help if they increase the amount of revenue they get from each patron. They’d rather have you spend $15 than $12, right?

So, completely theoretically, what if they make a change that doesn’t technically bring Patreon more revenue, but nonetheless makes $12 one-dollar donations cost more after fees than three five-dollar donations do?

Surprise!

[There’s a section I’ve deleted here that went into specific numbers: “I’m not convinced it’s the shitshow it’s been widely received as.” As Patreon themselves noted in their retraction, this change disproportionately affects low-value pledges, but it doesn’t necessarily follow that creator revenues would go down. While I spent a lot of time digging into those numbers, they’re all moot now.]

Going forward

First, while I can’t be positive this isn’t would have been the Patreoncalypse everyone else seems to think it is, so far that’s not supported by the data. Let’s check back in a month. Meanwhile, if we’re going to be angry about it, at least let’s make sure we’re angry over accurate information. I’ve seen a lot of (well-intentioned) bullshit passed around.

Second, if you’re a creator using Patreon who’s willing to stick with the platform, but you don’t have reward levels designed to encourage people to go up to the $5 or higher level, consider changing that. I’m not suggesting getting rid of the $1 level, but the transaction fees drop off sharply with just a few extra bucks. ($1 becomes $1.38, but $3 becomes $3.44, and $5 becomes $5.50.) even without the new transaction fees, this will really help you get higher revenue.

Third, lest I come across too much as saying “everyone should just rally around Patreon,” well: no. I’ve been an advocate of owning your own space on the internet for a long time, and that’s why I consolidated a lot of my presence to a new home earlier this year. There’s a strong argument for hosting your own content on your own site, using a service like Memberful to handle subscription management. But this isn’t something everyone’s up for doing on their own. No matter how easy you make it, it costs time and money.

So here’s that asterisk about large vs. small creators I promised I’d come back to (remember?). To earn that $450M valuation Patreon has, they’re going to have to double revenue every year for the next four or five. Wouldn’t a great way for them to start making serious bank be to start landing creators who can get a few hundred thousand patrons instead of just a few thousand?

As of this writing, just six creators have more than 10,000 patrons. The top of the “long tail” curve Patreon has just isn’t that far above the bottom. This is the part of Patreon’s business that I suspect investors are most keen on changing. It’s great that Patreon can get Amanda Palmer now, but they’re going to need to get Imagine Dragons. I don’t mean “the next” Imagine Dragons, either. I mean an existing artist who can bring a bazillion fans with them.

And to do that, going after Financially Successful Creators™ as they’ve defined it now isn’t good enough. They can’t just go after people they think Patreon can bring to the next level. They’re going to have to go after people who are already making six- or even seven-figure incomes from their art. They have to be able to say, hey, if you take a chance on us, we can give you the same income with fewer middlemen.

Maybe they can do that while still providing good service for “little guys”—by which I mean everyone currently on the platform—the way WordPress seems to have managed. But it’s tough to be both a consumer-focused company and an enterprise-focused one.

And, yes, “enterprise-focused” is what I mean. It’s just that the big value unicorn in Patreon’s space isn’t General Electric. It’s Beyoncé.