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I have now seen repeatedly people who clearly aren't Patreon creators make the same mistaken surmise about how the money works. From that Reddit thread:
Heretofore, if you were a creator with a by-month Patreon campaign, and had a single patron pledging one dollar, each month, you would get about $0.90.
Patreon did not charge the transaction fees directly to creators. They charged a "approximately 5%" fee to "cover credit card processing fees".
Let me be really clear about this: Patreon promised creators they would cover payment processing costs by charging creators a per-pledge fee that.... was not actually tied to the amount it cost Patreon to actually pay for the payment processing cost for that pledge.
So, if you were, as above, a creator with a by-month Patreon campaign with a single patron pledging one dollar, Patreon's agreement with you is that they'd pay you $0.90 or so, but then Patreon would have to turn around and pay for the payment processing (with Stripe or Paypal or whomever) on that $1 out of the $0.05 they took from you to do it.
How much does it cost Patreon to do that payment processing? Well, both Paypal and Stripe are presentingly charging the public $0.30+2.9%.
On $1, that means the payment processing fee Patreon would have to pay is... $0.33.
But they only took $0.05.
Well, they took $0.05 for paying for payment processing fees, and another $0.05 for profit.
That adds up to $0.10, which is still $0.23 cents short.
If a creator has a by-month Patreon campaign and only one patron pledging one dollar – and if Patreon is paying anything like current rates at Paypal and Stripe – then Patreon would be losing money on that campaign every month.
Which raises the obvious question: how extensive are the circumstances under which Patreon would lose money?
As has been much discussed, Patreon's soon to be abolished practice of batching patron's pledges and only charge them once a month greatly reduces transaction charges by getting rid of a bunch of those $0.30 fees.
If we had two hypothetical by-month Patreon campaigns each with a patron pledging $1, and it was the same patron, then Patreon would be stuck losing $0.23 cents fulfilling one, but only having to pay $0.03 on the other, which means they would profit about $0.07. Together, Patreon only loses $0.16.
So how many $1 pledges does a patron have to make for Patreon's old fee model to break even? At three $1 pledges, Patreon loses $0.09 total. At four pledges, Patreon loses $0.02. At five pledges, finally, Patreon comes out ahead by $0.06. Which is a hair over 1%.
But that's not really "breaking even", business-wise. Remember, Patreon tells us that 5% or so went to payment processing, and 5% was supposed to be their money, for running their business and paying their other expenses and maybe making a profit.
At $5 worth of $1 pledges, a patron isn't costing Patreon more than they're paid. At $5/patron, Patron isn't hemorrhaging money. (Presuming a $0.30+2.9% processor rate). But they aren't making ends meet, either.
So how much does a patron have to pledge (at a processor rate of $0.30+2.9%) for the amount Patreon says they're charging creators – 5% – to actually cover payment processing costs?
Fourteen dollars and twenty nine cents, per month.
The equation – check my math! – is, simply, when is 5% of something the same as 2.9% of the same thing plus 0.30? 0.05 X = 0.30 + 0.029 X Solve for X.
So, apparently, any patron paying a total of less than $14.29 per month – could be a patron paying 13 by-month creators $1 each or a patron paying one by-month creator $13 or a patron paying a by-work creator $1 per creation for 13 creations per month, or any combination of pledges that adds up to less than $14.29 per month – would be losing Patreon money.
Patreon can only batch payments from a single patron, so they can only reduce their expenses for payment processing when individual patrons pledge enough. (Which also explains why they were so hot to cross-sell patrons on other creators.)
If every patron who pledges less than $14.29 per month loses Patreon money because they've promised to pay the creators 90% even when processing is 33%, that would certainly explain why Patreon wants big spenders. It also explains the weirdnesses in Patreons conflicted attitudes about "unsuccessful" creators.
How much money Patreon makes from a creator is not a function of how popular they are. Not directly. If a creator showed up with a million fans, all of whom fund no other creators, all of whom pledge $1 per month, the creator would be getting $900,000 – which is totes "full time", "life-changing" – but at the same time that would bankrupt Patreon. Unless Patreon has some way of covering the (1,000,000 x $0.23) monthly loss of $230,000 on just that account.
A creator who attracts fans who are willing to pledge more – either more per month, or enough more per item for sufficiently prolific creators – such that on average most of their fans are paying more than $14.29 per month is a creator who is profitable for Patreon. A hypothetical creator who brought in a bunch of fans who then also pledged other creators, such that they each got up over $14.29 that way, that would also work.
But it's not really about the creators: it's about the patrons. There's no amount that a creator can earn, no amount of patrons a creator can attract – as the million-patron example above shows – that's sufficient, in itself, to be profitable to Patreon. It's not about creators being the right kind of creators for Patreon. It's about patrons being the right kind of patron for Patreon.
Patrons who pledge over $14.29 per month.
Or whatever the number is, for whatever fee structure they've negotiated with their payment processors. If it has a by-transaction component to the fee – like that $0.30 – then it's an issue, and all that will change is the threshold of profitability on a patron.
I don't think what Patreon is doing is just all about the money; the regulatory issues previously mentioned are too compelling. And if it were just about balancing the books or making more profit, the obvious solution would be to have patron incentives – which explains why Patreon is bullish on creators having reward tiers. If anything, they don't seem anywhere near as bullish as this financial model would suggest they should be. In fact, Patreon seemed (seems) not to realize how much their (old) business model's profitability is (was) tied not to attracting lots of patrons, nor attracting creators who make a lot of money, but getting patrons to be big spenders. If they did realize that, I think they'd be doing more, for better or worse, at trying to get creators to incent more spending of patrons, rather than generally getting more patrons. Or they might have done something like require patrons to pledge a minimum of $15 at a time.
I just went back to my data, to my very first month on Patreon. I had 36 patrons sign up, and made three posts. I had saved a dump of the data from Patreon, so I was able to pour it into a spreadsheet, and do the necessary calculations. My average total pledge per patron per that month was $12 (yes, accounting for individual's limits and the fact that Patreon doesn't charge patrons for posts made before they signed up.) According to my math, assuming the $0.30+2.9% rate, and not accounting for any batching due to patrons of mine funding other creators, Patreon was on the hook for $23.33 in transaction fees. Five percent of what I was pledged was $21.60. So they didn't lose money, but it did cut into their share by about $1.75.
I also just ran the math on my last month. I had 139 patrons. My average pledge was $2.91. My average payment per patron for the month was $5.24. Assuming the $0.30+2.9% payment processor rate, processing those charges cost Patreon $62.82. Five percent of my total pledges was only $36.42.
Basically, Patreon's budget for my own campaign's payment processing was exceeded by $26.40 last month. That came out of the $36 they expected to make for their own expenses. Their system budgeted $36 earnings from my account, but they got $10.
So, despite the fact I'm doing pretty well on Patreon – Graphtreon ranks me #183 in the Writing category, and I'm one of apparently fewer than 600 creators whose average pledge is over $2 – Patreon is basically losing money on me.
Loose change thoughts:
• Back in the '00s, in the early days of ecommerce, there was a joke, IIRC most often made of Amazon, "We're losing money on every sale, but we'll make it up in volume." Looks like Patreon may have made that mistake, for real.
• It's hard to get certain information out of Graphtreon, because some creators choose not to reveal the relevant info to the public. But when I checked a couple days ago, there were only about 450 or so creators that had average pledges over $2. I'm guessing that the rate is about the same for those who aren't making their info public, which is where I'm getting that 600 number.
• I would have thought that Patreon would have had the clout to negotiate a better rate than $0.30+2.9%, but maybe not.
• This is so not what I was going to write about this week.
This post brought to you by the 131 readers who funded my writing it – thank you all so much! You can see who they are at my Patreon page. If you're not one of them, and would be willing to chip in so I can write more things like this, please do so there.
Please leave comments on the Comment Catcher comment, instead of the main body of the post – unless you are commenting to get a copy of the post sent to you in email through the notification system, then go ahead and comment on it directly. Thanks!
I have now seen repeatedly people who clearly aren't Patreon creators make the same mistaken surmise about how the money works. From that Reddit thread:
This is how it is currently divided up: $1 each creator - credit processing fee - patreons percentage = creators cut roughly $0.60.Hahahaha, nope.
Heretofore, if you were a creator with a by-month Patreon campaign, and had a single patron pledging one dollar, each month, you would get about $0.90.
Patreon did not charge the transaction fees directly to creators. They charged a "approximately 5%" fee to "cover credit card processing fees".
Let me be really clear about this: Patreon promised creators they would cover payment processing costs by charging creators a per-pledge fee that.... was not actually tied to the amount it cost Patreon to actually pay for the payment processing cost for that pledge.
So, if you were, as above, a creator with a by-month Patreon campaign with a single patron pledging one dollar, Patreon's agreement with you is that they'd pay you $0.90 or so, but then Patreon would have to turn around and pay for the payment processing (with Stripe or Paypal or whomever) on that $1 out of the $0.05 they took from you to do it.
How much does it cost Patreon to do that payment processing? Well, both Paypal and Stripe are presentingly charging the public $0.30+2.9%.
On $1, that means the payment processing fee Patreon would have to pay is... $0.33.
But they only took $0.05.
Well, they took $0.05 for paying for payment processing fees, and another $0.05 for profit.
That adds up to $0.10, which is still $0.23 cents short.
If a creator has a by-month Patreon campaign and only one patron pledging one dollar – and if Patreon is paying anything like current rates at Paypal and Stripe – then Patreon would be losing money on that campaign every month.
Which raises the obvious question: how extensive are the circumstances under which Patreon would lose money?
As has been much discussed, Patreon's soon to be abolished practice of batching patron's pledges and only charge them once a month greatly reduces transaction charges by getting rid of a bunch of those $0.30 fees.
If we had two hypothetical by-month Patreon campaigns each with a patron pledging $1, and it was the same patron, then Patreon would be stuck losing $0.23 cents fulfilling one, but only having to pay $0.03 on the other, which means they would profit about $0.07. Together, Patreon only loses $0.16.
So how many $1 pledges does a patron have to make for Patreon's old fee model to break even? At three $1 pledges, Patreon loses $0.09 total. At four pledges, Patreon loses $0.02. At five pledges, finally, Patreon comes out ahead by $0.06. Which is a hair over 1%.
But that's not really "breaking even", business-wise. Remember, Patreon tells us that 5% or so went to payment processing, and 5% was supposed to be their money, for running their business and paying their other expenses and maybe making a profit.
At $5 worth of $1 pledges, a patron isn't costing Patreon more than they're paid. At $5/patron, Patron isn't hemorrhaging money. (Presuming a $0.30+2.9% processor rate). But they aren't making ends meet, either.
So how much does a patron have to pledge (at a processor rate of $0.30+2.9%) for the amount Patreon says they're charging creators – 5% – to actually cover payment processing costs?
Fourteen dollars and twenty nine cents, per month.
The equation – check my math! – is, simply, when is 5% of something the same as 2.9% of the same thing plus 0.30? 0.05 X = 0.30 + 0.029 X Solve for X.
So, apparently, any patron paying a total of less than $14.29 per month – could be a patron paying 13 by-month creators $1 each or a patron paying one by-month creator $13 or a patron paying a by-work creator $1 per creation for 13 creations per month, or any combination of pledges that adds up to less than $14.29 per month – would be losing Patreon money.
Patreon can only batch payments from a single patron, so they can only reduce their expenses for payment processing when individual patrons pledge enough. (Which also explains why they were so hot to cross-sell patrons on other creators.)
If every patron who pledges less than $14.29 per month loses Patreon money because they've promised to pay the creators 90% even when processing is 33%, that would certainly explain why Patreon wants big spenders. It also explains the weirdnesses in Patreons conflicted attitudes about "unsuccessful" creators.
How much money Patreon makes from a creator is not a function of how popular they are. Not directly. If a creator showed up with a million fans, all of whom fund no other creators, all of whom pledge $1 per month, the creator would be getting $900,000 – which is totes "full time", "life-changing" – but at the same time that would bankrupt Patreon. Unless Patreon has some way of covering the (1,000,000 x $0.23) monthly loss of $230,000 on just that account.
A creator who attracts fans who are willing to pledge more – either more per month, or enough more per item for sufficiently prolific creators – such that on average most of their fans are paying more than $14.29 per month is a creator who is profitable for Patreon. A hypothetical creator who brought in a bunch of fans who then also pledged other creators, such that they each got up over $14.29 that way, that would also work.
But it's not really about the creators: it's about the patrons. There's no amount that a creator can earn, no amount of patrons a creator can attract – as the million-patron example above shows – that's sufficient, in itself, to be profitable to Patreon. It's not about creators being the right kind of creators for Patreon. It's about patrons being the right kind of patron for Patreon.
Patrons who pledge over $14.29 per month.
Or whatever the number is, for whatever fee structure they've negotiated with their payment processors. If it has a by-transaction component to the fee – like that $0.30 – then it's an issue, and all that will change is the threshold of profitability on a patron.
I don't think what Patreon is doing is just all about the money; the regulatory issues previously mentioned are too compelling. And if it were just about balancing the books or making more profit, the obvious solution would be to have patron incentives – which explains why Patreon is bullish on creators having reward tiers. If anything, they don't seem anywhere near as bullish as this financial model would suggest they should be. In fact, Patreon seemed (seems) not to realize how much their (old) business model's profitability is (was) tied not to attracting lots of patrons, nor attracting creators who make a lot of money, but getting patrons to be big spenders. If they did realize that, I think they'd be doing more, for better or worse, at trying to get creators to incent more spending of patrons, rather than generally getting more patrons. Or they might have done something like require patrons to pledge a minimum of $15 at a time.
I just went back to my data, to my very first month on Patreon. I had 36 patrons sign up, and made three posts. I had saved a dump of the data from Patreon, so I was able to pour it into a spreadsheet, and do the necessary calculations. My average total pledge per patron per that month was $12 (yes, accounting for individual's limits and the fact that Patreon doesn't charge patrons for posts made before they signed up.) According to my math, assuming the $0.30+2.9% rate, and not accounting for any batching due to patrons of mine funding other creators, Patreon was on the hook for $23.33 in transaction fees. Five percent of what I was pledged was $21.60. So they didn't lose money, but it did cut into their share by about $1.75.
I also just ran the math on my last month. I had 139 patrons. My average pledge was $2.91. My average payment per patron for the month was $5.24. Assuming the $0.30+2.9% payment processor rate, processing those charges cost Patreon $62.82. Five percent of my total pledges was only $36.42.
Basically, Patreon's budget for my own campaign's payment processing was exceeded by $26.40 last month. That came out of the $36 they expected to make for their own expenses. Their system budgeted $36 earnings from my account, but they got $10.
So, despite the fact I'm doing pretty well on Patreon – Graphtreon ranks me #183 in the Writing category, and I'm one of apparently fewer than 600 creators whose average pledge is over $2 – Patreon is basically losing money on me.
Loose change thoughts:
• Back in the '00s, in the early days of ecommerce, there was a joke, IIRC most often made of Amazon, "We're losing money on every sale, but we'll make it up in volume." Looks like Patreon may have made that mistake, for real.
• It's hard to get certain information out of Graphtreon, because some creators choose not to reveal the relevant info to the public. But when I checked a couple days ago, there were only about 450 or so creators that had average pledges over $2. I'm guessing that the rate is about the same for those who aren't making their info public, which is where I'm getting that 600 number.
• I would have thought that Patreon would have had the clout to negotiate a better rate than $0.30+2.9%, but maybe not.
• This is so not what I was going to write about this week.
This post brought to you by the 131 readers who funded my writing it – thank you all so much! You can see who they are at my Patreon page. If you're not one of them, and would be willing to chip in so I can write more things like this, please do so there.
Please leave comments on the Comment Catcher comment, instead of the main body of the post – unless you are commenting to get a copy of the post sent to you in email through the notification system, then go ahead and comment on it directly. Thanks!
Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 10:11 am (UTC)Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 03:21 pm (UTC)Actually, they're making it up on growth. They grow fast enough for the increase to cover the previous month's shortfall. It's sort of the e-commerce equivalent of kiting checks.
Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 03:46 pm (UTC)Forgive me if the answer should be obvious from your post, but I've been running a fever. Brain work is not my friend today.
Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 05:07 pm (UTC)Thank you for taking the hit. I am finding what you are writing to be extremely valuable.
Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 07:53 pm (UTC)Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 10:45 pm (UTC)Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 10:45 pm (UTC)Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 05:38 pm (UTC)But that may not be terribly relevant here. That "approximately 5%" you mention may be their way of saying "we're going to charge everyone the same by-percentage processing fee, and that's determined by how much we paid in total for processing fees.". De-batching destroys their ability to do that.
The reason that they cite in their original posting is to make the amount paid to creators consistent. If their biggest-drawing creators — the ones making thousands of dollars a month (Jeph Jacques, for instance, who I know is objecting to this change) or tens of thousands per thing (Amanda Palmer, who is of mixed feelings, but seems generally against) — are the ones who are complaining the most about that, I suspect that Patreon is going to give them far more weight than someone who is only drawing a handful of patrons for a handful of money.
However, one thing of credit cards is certain: every processor has a per-transaction-plus-percentage fee. If you're a business which accepts credit cards, you have to deal with this. Anyone on Patreon should expect to deal with it; it's how credit cards work. (Whether this should be how credit cards work is a whole separate question; for the moment I'm taking it as an unalterable force of nature.) If a creator doesn't want to deal with the vagaries of credit card transactions, particularly with Patreon taking a lot of the variability out of the equation, perhaps that creator shouldn't be on Patreon at all.
Cited elsewhere is the peek-and-punt asshole, which is the putative reason for Patreon to go to a charge-first mechanism. Patreon can still go charge-first for the per-month accounts by charging new patrons immediately on subscription. (They can also presumably fold the associated processing fee into their monthly processing fee total. I have no idea how much that might alter their per-month fees.)
My sample size is small, but I've yet to see a creator who is in favor of this change. Of the ones I follow, all but one has spoken out against it; that one hasn't said anything at all. The two I cited above (Jeph Jacques and Amanda Palmer) are ones I don't follow, but have been directed to as making useful public posts on the subject.
Given the lack of support from creators, and the almost universal response from patrons, I can only write this off as either a huge money grab on Patreon's part, or that they've had a massive regulatory crackdown on the back end and have been told to hush it up. My bet is on the former.
Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 05:51 pm (UTC)Patreon's new fee structure is $0.35 + 2.9%. Paypal and other services are charging $0.30 + 2.9%. I don't know how many donations Patreon takes in a month, but that extra nickel is going to be worth a fair bit of money. As of May, Patreon said they had a million patrons. If we assume that each patron is making two donations per month — I think I'm being conservative here — that's an extra $100,000/mo, or $1.2 million/yr, that Patreon takes away in clear profit.
Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-10 10:52 pm (UTC)I think my post gives a third reason. As I mused to my sweetie prior to writing this – part of the line of thinking which got me to pull out the spreadsheets and do this work – "Hmmm. Lots of people are speculating that the VCs are pressuring Patreon to have more return on their investment. While that's possible, as others have pointed out, it's unusual for VCs to pressure a company for a better return at this particular stage in a startup's development. An alternative possibility is that when the VCs came in, they brought actual accountants with them. It may be that as a company run by artists, it really was doing something financially boneheaded, that was only caught when grownups got involved and used math. Something like, I dunno, losing money on every small transa... Oh."
I've yet to see a creator who is in favor of this change
Found one. One who sits in on Patreon's board of directors.
Re: Comment Catcher: The Fourteen Twenty-Nine Hypothesis
Date: 2017-12-11 03:58 am (UTC)Yet if they're handling transaction fees the way I think they are, that is, taking all the transaction fees and dividing them as a straight percentage over all donations, I suspect that "approximately 5%" for covering the fees is actually covering most if not all of the transaction fees.
The same May announcement of a million patrons also said that each patron pays "about $12" per month. While the shape of that curve is going to make a substantial difference in what the actual fees are, $12/mo at the current fee structure is 5.82%, and at Paypal's fee structure is 5.4%. I'd consider either one of those to be "approximately 5%". If they've been taking less than that — or less than whatever their actual number works out to — then sure, they're eating into their own 5% fee, but absent an actual balance sheet, I have no idea if they're losing money.
Once again going to that May announcement, Patreon is on track to pay creators $150 million in 2017. 5% of $150 million is $7.5 million. That $1.2 million I posit in my guess of the worth of a nickel on their card processing fees is a 16% increase in their gross, and likely a substantially larger fraction than that on their net profit. Still smells like a money grab to me.
(no subject)
Date: 2017-12-10 03:27 pm (UTC)Which makes it even nastier, in my eyes, that Patreon is framing this as the creators' success or failure. Way to outsource the guilt.
(no subject)
Date: 2017-12-10 05:05 pm (UTC)(no subject)
Date: 2017-12-10 07:47 pm (UTC)(no subject)
Date: 2017-12-10 09:17 pm (UTC)If so, I am comforted by the fact that every creator I know personally—including myself—is not feeling supported or recruited so much as burned and betrayed. The trouble now is what the viable alternatives are.
(no subject)
Date: 2017-12-10 10:44 pm (UTC)(no subject)
Date: 2017-12-11 12:23 am (UTC)I would love it if some pissed-off ex-Patreon creator were the one to invent the replacement service, but sadly that is not going to be me. I just feel it would be nice.
(no subject)
Date: 2017-12-10 10:43 pm (UTC)Part of – and just part of – what has me so pissed off is this sense I'm being used as a human sheild. Not in my name you motherfuckers.
(no subject)
Date: 2017-12-25 07:07 am (UTC)I heard that phrase from my dad, who wasn't using the Internet in the early days of eCommerce, so I suspect that it dates back a few decades further.