The business of Patreon

Patreon EC-1 Part 3: Building a new economy for creators requires a focused business strategy

Patreon provides business infrastructure to independent content creators: people making videos, music, podcasts, paintings, comics, games, magazines and other forms of media for fans online. It helps them turn the small subset of superfans within their broader fan base into paying monthly patrons and manage relationships with those patrons across the web. Patreon is angling to become the dominant platform for creators to build these membership businesses, a position from which it could expand into other products and services for creators.

In this section of the EC-1, I am digging into the structure, performance and health of Patreon as a business. The sections are organized as follows:

  1. Business model
  2. Revenue
  3. User metrics
  4. New revenue streams
  5. Costs and efficiencies
  6. Mergers and acquisitions
  7. Investors and fundraising

My analysis of Patreon’s product, competitors, and overarching thesis have been spun out as their own articles.

Reading time for this article is about 20 minutes. It is part of the Extra Crunch EC-1 on Patreon. Feature illustration by Bryce Durbin / TechCrunch.

Business model

Patreon’s business model is straightforward, though it is becoming more complex. It charges creators 10 percent of their revenues through the platform, which is divided into a 5 percent platform fee and a 5 percent payment processing fee. Patreon has always had a flat 5 percent platform fee, but its payment processing fees have varied in the past.

Patreon has shifted strategy, no longer acting as a marketplace connecting fans and creators but as a SaaS platform with a suite of tools for creators. Rather than viewing its fees as a marketplace rake, a better analogy is to the commission model akin to that of a talent manager, agent or record label. Patreon’s incentives are directly aligned with its customers’ goal of generating more income from their fans.

That simple model will get more complicated, as Patreon is poised to introduce additional commission fees in exchange for access to some new functionality and services. Plus, the company acquired two startups last year (Memberful and Kit), which each come with their own business models.

Revenue

On January 23rd, Patreon announced it expects to process more than $500 million in payments in 2019. That would put the company’s 2019 revenue from its core Patreon platform at north of $50 million, given its 10 percent cut.

Back in May 2018, CEO Jack Conte said in a video that they would process $300 million in payments that year, implying roughly $30 million in revenue for 2018. That was twice the $150 million they processed in 2017 (the payment fee was variable until 2018, so the 10 percent assumption doesn’t hold for 2017, but I assume revenue was in the $12-15 million range).

Graph of payments processing volume by Patreon since founding, shared on Twitter on February 6, 2018 by Patreon CEO Jack Conte

None of these figures include revenue from Memberful or Kit. Kit’s revenue is likely a rounding error by comparison, and there is no longer any team working on it or resources allocated to developing it further. 

In contrast, Conte told me calling Memberful a rounding error would be “way off” and that it’s a product with “incredible product-market fit and incredible traction” whose revenue doesn’t look tiny next to Patreon’s. TechCrunch’s Josh Constine reported it had 500 paying customers and seven employees at the time of the acquisition. I haven’t found helpful data to use in estimating Memberful’s revenue, so whether this is $3 million or $5 million or another amount, I don’t know.

Is Patreon profitable? “Yeah, we’ve a ways to go there,” said Conte. After multiple years of trying to figure out its long-term business model and role within the online creator ecosystem, Patreon has clarified that creators are its customers and it will generate new revenue streams by offering new products and services to them.

User metrics

Creators

Patreon reports the total number of creators earning at least $1 on its platform as “over 100,000,” but they have been using that statistic since mid-2018. The independent website Graphtreon, which estimates Patreon data using the company’s API, says the total number of creators with at least one patron is 132,500. 

Based on this same Graphtreon data set, the number of creators increased 105 percent year-over-year in 2017 (to 92,500), but then only 39 percent in 2018 (to 129,000). Patreon’s Head of Communications said the correct 2018 growth rate for creators is “slightly over 50 percent growth.”

Revenue almost doubled over the last year, and revenue is tied to creator earnings. If revenue growth is holding steady while creator growth is slowing, it implies Patreon is adding fewer small creators who don’t generate much income, but is still gaining strong traction among more established creators who do.

Creator churn tightly correlates to creator income on the platform. People don’t walk away from a meaningful source of income, but they will walk away if they have been trying to gain patrons for weeks and only have $10 to show for it. A large number of creators join Patreon before they have a fan base — they see successful creators on Patreon and mistakenly attribute that success to joining Patreon rather than bringing a pre-existing fan base to it. They churn after a few months of gaining little to no financial backing. 

From the data Patreon agreed to show me during my research, I can tell you that the annual churn rate of Patreon creators drops under 1 percent for those generating $500 per month in revenue through the platform. The greater the income, the lower the churn, and after $1,000 per month in particular, it is very rare for creators to leave the platform at all.

$1K Creators

Given those churn metrics, Patreon’s team now measures the company’s progress by two KPIs: 1) the number of creators earning $1,000+ per month and 2) the total amount of money those creators are earning through Patreon.

This focus on $1,000+ per month creators (which I’ll refer to as “$1K Creators”) likely derives from their stickiness as customers, the disproportionate contribution they make to Patreon’s revenue and the strategic decision to narrow the platform’s scope to building tools for creators with existing fan bases (not trying to help creators without fan bases get discovered).

These $1K Creators receive 70 percent of the patronage and so generate 70 percent of Patreon’s revenue (or ~$35 million in 2019). Given the extent to which content is a hits business, in which the superstars in each field capture a massively disproportionate percentage of the economics, Patreon is less top-heavy than one might otherwise expect. While it has many $50,000+ per month creators, and indeed its single highest-earning creator — earning roughly $400-500,000 per month by my estimate — accounts for nearly 1 percent of all money flowing through the platform, Patreon’s dominant revenue source is creators earning between $1,000 and $50,000 per month. This is the mid-tail of content creators that the company’s business thesis hinges on.

Patreon doesn’t disclose how many $1K Creators there are, but CEO Jack Conte said “It’s a tiny portion. Because it’s an open platform, we at one point had hundreds and hundreds of thousands of creators who were making $0.” By the estimates of Graphtreon creator Tom Boruta, there are currently more than 4,300 creators making at least $1,000 per month (and more than 9,200 creators making $500+ per month). That small subset — 4,300 out of 132,500 active creators or about 3.2 percent of its customers — is Patreon’s core focus nowadays.

Patrons

In 2018, creators used Patreon to generate income from more than 3 million active patrons. That is a 50 percent year-over-year increase from the 2 million patrons Patreon had processed payments from in 2017. Using data from Second Measure — a firm that tracks billions of anonymized debit and credit transactions from millions of U.S. consumers — Patreon appears to be retaining patrons at a healthy rate. Averaging across several cohorts, 62 percent of first-time patrons on Patreon are still sending payments six months later and 51 percent are still doing so after a year. For comparison, those retention rates are about 10 percent behind Netflix’s best-in-class 73 percent and 66 percent metrics, respectively, but on par with those of Hulu (61 percent at six months and 53 percent at 12 months).

Far from a uniquely San Francisco phenomenon, patrons are geographically distributed too. According to the same Second Measure data set, while New York City leads in (U.S.-based) patrons, San Antonio is the second most common city with 2.2 percent of U.S. transactions, with Austin, Chicago, Houston, Las Vegas, Dallas, Tucson, Colorado Springs and Atlanta all making appearances in the top 20 (a “city” here is a legal jurisdiction, not a metro area). Moreover, Patreon confirmed that 40 percent of all money flowing through Patreon since founding has come from patrons outside the U.S. 


New revenue streams

Patreon has among the lowest fee structures on the market. YouTube, as a comparison, takes 30 percent from its competing fan memberships product and historically 45 percent from ad revenue. From my interviews, most creators still think of Patreon as taking just 5 percent — they don’t emotionally attribute the 5 percent processing fee to the company. Conte set the 5 percent platform fee at founding to establish Patreon as the most creator-friendly platform.

The problem is, it’s too friendly. Conte admits that Patreon’s current fee structure isn’t lucrative enough for it to operate profitably as a business: “It’s not enough. We’ve got to figure something else out.” This low fee rate — comparable more to a payment processor like Stripe than other platforms for creators and fans — was the main critique from VCs I talked with as well (both those who invested in the company and those who did not). 

Patreon therefore needs additional revenue streams, and, unsurprisingly, it is already developing them. The company is preparing to offer additional functionality to creators in exchange for a higher cut of their revenue. Conte talks about this as a “value for value” plan:

We will try to build things that people are excited to pay for and then we’ll stack new services and products into an ecosystem that over time lift Patreon’s blended rake, so that it’s higher. But we want to do that in a way that isn’t a forced price hike. We want to do that in a way where people opt-in and can pay more if they want to for new things that we’ve built…

Tiered pricing would be the most compelling path for the company to take here. It allows it to keep a 5 percent + 5 percent base rate that blocks it from being undercut by a competitor on fees while upselling creators into a premium set of features that give it a higher commission on creator revenue while also hopefully helping drive more top line revenue toward those creators. I expect premium offerings for creators will include both software features and more hands-on business guidance from Patreon’s creator relations staff.

There are a couple of ways forward for Patreon’s pricing strategy. The company could offer a small number of tiers that package together a bunch of premium features — say a Premium tier with a 10 percent + 5 percent rate and a Pro tier with a 15 percent + 5 percent rate. Alternatively, it could offer creators additional features as à la carte add-ons, such as extra CRM analytics for an additional 2 percent commission per month. However, that approach feels incongruent with Patreon’s focus on simplicity: it’s complicated and would make creators resent getting charged more for every little feature.

In my interviews with a dozen creators who use Patreon, I heard few complaints about the platform’s fees, and, indeed, an almost universal willingness to consider higher fees in exchange for more support. That bodes well for Patreon’s future business strategy.

In addition to these premium additions to its core product, Patreon is pursuing three extensions that also represent new revenue streams: its API, merchandise features and the white-label platform Memberful.

API & app store

As I noted in my product analysis, Patreon’s new game plan is to build the core CRM, analytics and financial infrastructure for a membership business, then plug into all the other platforms and apps that its creators might want to leverage. Patreon has an Open API that is primarily used by a small number of partners they are working closely with, although the company intends to promote it more in the future. (Patreon has not disclosed any financial arrangements it has made with these initial integration partners, like Reddit.)

Apps that build features dependent on their API (like Bonjoro, which lets creators send personalized video messages to fans) don’t currently have to pay any cut of their revenue back to Patreon. That’s an obvious opportunity for a new revenue stream: creating an app store for creator-focused tools where Patreon takes a percentage of revenue like Salesforce does through its AppExchange or Apple does through its App Store. When I asked about this, SVP of Product Wyatt Jenkins noted that it is on their radar: “Today we’re focused on a shorter list of great integrations…the third-party app store is longer term.”

Merchandise

The company is building merchandising features that make it easy for creators to design, buy and manage their own products. Don’t expect e-commerce transactions: Patreon is enabling merch to be offered only as a perk of joining a certain membership tier, not offered as goods to be directly purchased. You can read more about this in my product analysis, but from a financial standpoint, Jenkins said there will be multiple tiers of merch functionality depending on how much a creator wants Patreon to automate the process for them:

There’s the basic tier when you do the design yourself and just bring us the product and we do the rest. Then there is a higher tier where we can work with you and we’ve a marketplace of designers.

Assumably these tiers will have corresponding pricing differences as well. I don’t envision this doing the volume that a normal merch store will do for a creator. It creates additional perks the creator can use to upsell patrons into higher monthly tiers, but they will still want a store where fans can just buy a t-shirt or coffee mug, and that’s easier than ever with options like YouTube’s Teespring integration or the whole industry of full-service e-commerce solutions that have popped up for online creators.

Memberful

We can split into two camps the market of creators adopting membership business models: those wanting a full-service solution (limited technical involvement, extra customer support) and those wanting a white-label, DIY solution (a suite of tech tools that can be customized to fit specific needs). Patreon is the leading platform for the full-service camp. To be the central player in helping creators build their businesses as its thesis envisions, it needs to have dominant market share in both camps though.

Thus, Patreon acquired Memberful last year. It is a membership management platform similar to Patreon in mission but focused on creators and media companies that want white-labeled, customizable infrastructure to add paywalls, recurring payments, a CRM and member benefits on their own website. Small media brands like Stratechery, Gimlet Media and Farnam Street use it, as does the business publication QuartzMemberful offers three pricing models: a flat 10 percent fee on payments processed, a 4.9 percent fee with a $25 / month subscription and customizable enterprise pricing.

Memberful enables Patreon to retain large creators who outgrow Patreon.com. Memberful will continue operating as an independent subsidiary, although I expect the company to provide funding to ensure it is the winner in this market. 

Costs & efficiencies

In terms of basic expenses, Patreon has a staff of roughly 170 full-time employees, a large office in the SoMa neighborhood of San Francisco with room for staff growth and I assume the standard costs that come with being a technology company at this stage. Specific to Patreon’s circumstances, let’s look at customer acquisition, segmentation and support, as well as payment processing.

Customer acquisition and retention

Patreon doesn’t spend money on paid user acquisition campaigns (at least, according to them). New creators are acquired primarily through a viral acquisition loop. Patreon gains new customers (creators) because each one promotes their Patreon to their fan base, and their fans naturally include other creators, some of whom will then join themselves and continue the cycle. It’s very cost efficient to have an acquisition loop more akin to a social networking platform than a traditional SaaS startup. 

Growth marketer Brian Balfour created this graphic to help explain Patreon’s unique viral loop. Image via Reforge

In contrast, Memberful doesn’t benefit from such a viral acquisition loop as a white-label product. Patreon informs me Memberful’s customer acquisition is primarily driven by word-of-mouth, but it’s fair to assume it will require ongoing investment in sales and marketing to acquire new customers over time.

Patreon’s one sales effort is a 6-person team within Creator Partnerships that recruits select top creators in each target category to join the platform, because once one of them does, numerous other creators in the category start joining as well. The company spends heavily on customer support instead of on sales and advertising.

When it comes to retaining $1K Creators and defending against competition, Patreon controls the credit card information of patrons. Creators can download a CSV file of their patrons’ contact information, but not their payment data. SVP of Product Jenkins noted, “The thing that’s really sticky about Patreon is that it’s just so hard to move 700 credit cards from one spot to another with consumers. It’s nearly impossible.” The switching cost is therefore quite high: even if a creator emails their fans to switch platforms, it is inevitable a meaningful portion of them will not move their payment over.

Better segmenting customers

Few challenges are harder for Patreon to balance than customer segmentation. As a startup evolves, it discovers where it has the strongest product-market fit and growth potential and then shifts resources accordingly, a process often referred to as “firing your worst customers.”

The metrics here are clear: the overwhelming majority of creators on Patreon can’t get to $500 in revenue per month on the platform, either because their fan bases aren’t large enough, or they aren’t highly engaged. Patreon could lose roughly 90 percent of its active creators — not even including the scores of registered creators with $0 in patronage — with relatively limited effect on its revenue.

Optimizing for its best customers is complicated though. Conte and his team fervently believe that Patreon should be an open platform for creators, and indeed, “firing” up-and-coming creators would be viewed as elitist and unsupportive when creators need help most. After all, today’s inexperienced creator could be tomorrow’s top earner.

However, joining Patreon too early is costly, both in terms of current expenses and future revenue growth.

New creators use Patreon’s generous creator support resources, which include the ability to contact a human for not just technical support but business advice on how to make better use of the platform. In contrast, Patreon’s creator relations team told me the highest value creators on the platform tend not to use creator support heavily because they’re more experienced or have dedicated staff.

Joining Patreon too early can also convince a creator that the platform doesn’t fit, when the issue is really that a creator’s fan base is under-developed. The aftertaste of an early bad experience can linger when a creator is more successful, preventing Patreon from capturing a customer when it later has excellent product-market fit.

Ultimately, Patreon needs to help creators understand whether the company can be helpful to them. That remains a work in progress. To date, Patreon hasn’t spread the message of its new business strategy or segmented its prime customers effectively. Based on my conversations (and from reading discussions online), it is still the norm for people to assume Patreon is a platform for new creators to find patrons rather than the infrastructure for creators who have somewhat established themselves to start monetizing existing fans. Every time Conte comments in the press or on Twitter recently, it seems to stir up another round of social media criticism partly tied to this misunderstanding.

The company is, however, making substantive changes to its onboarding process, such as including a questionnaire about audience size and engagement and adding a calculator to the homepage for estimating potential earnings based on existing audience size. These will begin to address the issue. Making it clear who Patreon is designed for will reduce the resources needed to support creators who aren’t the target customers.

Automation in creator support

Automating common creator support activities through software tools and educational content is a current priority for Patreon and important for its future. Patreon needs to build technology tools that deliver personalized business advice and actionable recommendations, and keep those tools simple for its target market. In particular, integrations with other online platforms and with apps built off the Patreon API (as well as analytics tools built in-house) will provide deep insights into each creator’s fan base, and Patreon will need to extract these insights and present them to creators.

As I argue in my competition article, I expect Patreon to increase the scale of its human-to-human business advice for creators as a strategy to differentiate itself from competitors and earn a higher commission rate. Automation of common tasks and business advice will be needed for Patreon to do this in a scalable way and avoid staffing a creator support organization that looks like a traditional talent management firm. The same need for automation applies to patrons asking for technical support as well as customer service related to the upcoming merch functionality.

Payments

At least publicly, half of Patreon’s revenue is earmarked for covering payment processing costs. It manages payments from fans so creators don’t need to worry about issues like expired credit cards, fraud, double charges, etc., while also providing creators financial analytics and tax information.

One tactic Patreon uses to reduce the percentage of patronage that goes to Stripe, PayPal and other payment processors is to bundle the total amount each patron is spending on the platform as one transaction that gets charged on the first day of the month. Think of it this way: you pledge $3 / month to five different creators; instead of charging you $3 five times, Patreon charges you $15 once and then redistributes the money to those creators accordingly. 

Processing fees come out of each creator’s total earnings, rather than being added to each patron’s transaction. Many patrons give just $1-2 per month, and adding processing fees to a $1 transaction could heavily discourage these users. These small pledges account for only a tiny proportion of creator earnings on Patreon, but many creators don’t want to exclude any fans from becoming patrons (and some rely more heavily than others on a large number of $1 supporters). Patreon announced plans to shift fees (of 2.9 percent + $0.35 per transaction) to the patron side in December 2017 but cancelled those plans within days due to vocal opposition from creators.

Instead, the company implemented a flat 5 percent processing fee that creators pay on their total revenue. There are economies of scale here: the larger Patreon gets by volume of payments processed, the lower it can negotiate its rates with payment processors. Its in-house tools for managing payment issues and providing creators with financial info have low marginal cost for supporting more creators, as well.

One more key element of Patreon’s payments is that it does not currently pay the customary 30 percent fees to Apple and Google when users of its iOS and Android mobile apps become patrons of a creator. Conte confirmed this with me but didn’t provide more detail. It appears that Patreon avoids the fees by having a mobile web browser pop up in the app to submit credit card information on patreon.com instead.

Just how much money are most patrons sending to Patreon creators each month? Using Second Measure data, in December 2018, Patreon’s distribution of transactions looked like this:

Remember that payments for each patron are bundled into one monthly transaction. Because the average number of transactions per consumer here is 1.1 per month, you can use the percentages above as rough approximations of the distribution in how much individual patrons are spending on Patreon per month. The most common transaction amounts are $5.00 (21.8 percent of transactions), $10.00 (12.3 percent) and $1.00 (12.1 percent).

According to Patreon’s website, the average amount spent by a patron is $12 per month (I assume that’s mean, not median, given the distribution above). On average, patrons are spending as much on Patreon as they are on their Netflix subscription (Netflix just increased the price of its most popular tier from $10.99 to $12.99).

Mergers & acquisitions

Patreon has made three acquisitions since its founding in 2013: direct competitor Subbable in 2015, then e-commerce affiliate link startup Kit and white-label membership infrastructure suite Memberful in 2018. Terms of the deals aren’t public, but all were relatively small companies at the time of their acquisition:

  • Patreon gained only 24 creators from acquiring Subbable — they were earning $1 million collectively from 12,000 patrons — but those creators were fairly well-known.
  • Patreon also acqui-hired Kit last year. It is maintaining Kit.com as an independent site but not putting any more resources into it. It’s a platform for creators like Tim Ferriss to curate their favorite products and make money through affiliate links when their fans purchase them. Kit gets a cut of the affiliate link income. This is not likely to become a more substantial revenue stream for Patreon, but it is likely to be kept operational in the medium-term until Patreon decides what to do with it. Its small NYC-based team now forms the Patreon product team building merchandise features.
  • Memberful is Patreon’s product to move upmarket for creators (and small media companies) who want a white-label solution with a lot of customizable features. There’s a section about it in my product analysis article. It operates as a separate company still, without integration into Patreon.

I expect Patreon will become an occasional acquirer of small startups that have built tools for creators to manage, analyze and/or monetize their fan base. When I asked Conte about future M&A, he said:

We don’t see Patreon building features for each category. We believe our basic CRM, analytics, membership, CMS product is valuable to multiple categories and is most important right now. But yes that leaves us open to things like ‘we’re going to be Patreon for newsletters’ and yeah, I can see a world where we’re building category-specific features and acquiring category-specific solutions.

Investors & fundraising

Patreon has raised $106 million in venture funding to date. According to my conversations with several VCs, each round was quite competitive, with new investors vying to get in and existing investors fighting to maintain their pro rata:

  • The first financing closed in July 2013, raising $2.1 million after Conte and Sam Yam set out to raise only $700,000; Josh Felser of Freestyle Ventures was the first investor to commit and CRV’s Saar Gur ultimately led the round.
  • The $15.3 million Series A in June 2014 was led by Danny Rimer at Index Ventures.
  • Both the $29.1 million Series B (January 2016) and $59.4 million Series C (September 2017) were led by Thrive Capital’s Chris Paik. TechCrunch reported the Series C valuation to be roughly $450 million.

The board of directors is comprised of founders Jack Conte and Sam Yam; investors Saar Gur, Danny Rimer and Thrive Capital’s Josh Miller (who recently replaced Chris Paik, who left Thrive); and independents Dick Costolo (former CEO of Twitter) and Goli Sheikholeslami (CEO of Chicago Public Media).

Given it has been 16 months since the Series C, Patreon is most likely already in the process of fundraising for a Series D round. The company has only recently set in motion plans for the new revenue streams discussed above and has a lot of work to do in developing them. The timeline to build these out and to continue securing market share among creators will take a lot more capital. In our conversations, Conte didn’t point to a specific number, but shared his intention to raise as much VC funding as possible: 

Look — I’ll probably get creamed for saying this — I don’t care about dilution. My feeling is raise the money…make sure you have enough capital to keep the lights on and make sure you have enough if the market turns.

Patreon now has substantial revenue that keeps doubling year over year — it is extremely successful for a startup. But it is also not the fastest growing company in Silicon Valley, where startups like Brex and Bird pop up and are worth more than $1 billion within a couple years. Conte is strong at selling Patreon’s vision; if he can raise enough money to support aggressive growth while still unprofitable and if his thesis about Patreon’s market opportunity proves correct, then it could grow into a multi-billion-dollar valuation too. Given its $50 million in recurring revenue, development of new revenue streams, and early market share among creators, I expect the Series D will likely turn Patreon into a startup unicorn.

The slower pace in getting there relative to some of the most buzzed-about startups is perhaps inevitable given that Patreon is trying to develop a new market. Membership business models do appear to be growing rapidly among creators, but it’s not realistic to think every podcaster, musician, illustrator, YouTuber, etc. is going to switch their business model as easily as someone adopts a ridesharing app or workplace chat tool.

Patreon is a play to own a growing niche — a specific business model used by a specific type of small business (creators). If it can dominate market share and successfully implement premium tiers and other revenue streams on top of its current base product, it could secure a powerful, entrenched position and ride the market’s expansion to hundreds of millions of dollars in annual recurring revenue. To understand the viability of this, join me in dissecting Patreon’s core thesis.


Patreon EC-1 Table of Contents

Also check out other EC-1s on Extra Crunch.