Patreon: Connecting Companies and Creators
By: Ethan Milne
The Ivey Business Review is a student publication conceived, designed and managed by Honors Business Administration students at the Ivey Business School.
A Hero for the Masses
Founded in 2013 by YouTube musician Jack Conte and his roommate Sam Yam, Patreon is an online platform that facilitates recurring donations to content creators. Patreon’s concept was inspired by the increasing dissatisfaction among content creators stemming from the low payouts of platforms like YouTube. Since inception, Patreon has been used to raise funds for creators’ videos, podcasts, online publishing, art, and more. From 2016 to 2018, Patreon grew from managing 830,000 monthly contributions to over 4.7 million and since inception, has raised over $105 million in venture capital funding.
Sponsors, called patrons, elect to pay either a monthly or per-creation fee to their creator(s) of choice in order to access exclusive content. Of this amount, Patreon collects five per cent as revenue, transaction fees on average consume another five per cent, and content creators receive the remainder. This average payout rate of 90 per cent is highly competitive for the industry, significantly exceeding YouTube’s AdSense payout rate of 55 per cent. In 2018, Patreon expects to provide creators with $300 million in aggregate funding, translating to more than $15 million in revenue for the company.
The Price to Pay
To date, Patreon’s success has largely been a result of the company’s commitment to users and its corresponding high payout rates. However, creators have begun to voice frustration with the high variability in third-party transaction fees. While averaging five per cent, these fees can range from two per cent to 10 per cent, with small donations subject to a greater transaction fee on a percentage basis. Creators who have the majority of their donations coming from transactions under $5 will therefore see a much higher relative transaction fee than creators with donations over $10. Since 47 per cent of creator income comes from donations below $5, this problem substantially affects Patreon’s user base. Indeed, in the company’s customer satisfaction surveys, fees are consistently mentioned by creators as an area of concern.
In 2017, Patreon attempted to solve this issue by transferring transaction fees onto donors. For each $1.00 pledged, patrons paid a net cost of $1.38. However, patrons proved highly price sensitive and many left the platform after this change was announced. In response, Patreon quickly reversed its decision and while patrons returned to the platform, the dissatisfaction surrounding transaction fees continues to persist. This experience suggests that Patreon would be vulnerable should an integrated rival with a strong financial position decide to compete on price.
Source: Patreon.com, TechCrunch, The Guardian
Rising Competition
A competitor with this profile has recently entered the patronage space. On June 21, 2018, video sharing behemoth YouTube announced the channel membership program, a new monetization option for channels with more than 30,000 subscribers. YouTube viewers were given the option to pay $4.99 every month to support their favourite YouTubers and to access exclusive content. YouTube currently takes a 30-per-cent cut of donations, far exceeding Patreon’s five-per-cent cut, but the company absorbs transaction costs and has the resources to weather a financial loss. If YouTube decided to wage a fees war against Patreon, Patreon would almost surely lose.
As a content hosting platform first and foremost, YouTube enjoys an additional advantage in that the vast majority of potential donors tend to be existing YouTube users. Converting viewers to sponsors through the content consumption channel itself may prove a far easier task than requiring viewers to join a completely new platform like Patreon. Given that viewers likely have a credit card linked to the Google platform via Google Play or another one of the company’s premium services, the friction to conversion is even lower. Since video content creators make up 27 per cent of Patreon’s creator base and 31 per cent of its payouts, YouTube’s entry into the patronage space poses a material threat to Patreon’s business.
With low barriers to entry, other large content platforms could easily follow YouTube into the patronage space. Podcasters, on platforms like iTunes, account for 12 per cent of Patreon’s payouts, and musicians using platforms like Soundcloud or Spotify make up another 4.8 per cent. Artists with audiences on Behance and DeviantArt could equally be drawn away from Patreon. To combat growing complaints about transaction fees and defend against content platform competitors, Patreon must evolve its value proposition beyond simply minimizing its service fees.
Creating Connections
Patreon has a simple mission: “fund the creative class.” Giving the most loyal audience members the ability to support their favourite creators through donations is one way of delivering on this mission. However, with a mere 3 per cent of YouTube video creators generating more than $16,800 a year from advertising revenue, creators are still in need of additional income. According to public data, less than 2 per cent of creators on Patreon are able to earn more than U.S. minimum wage from Patreon alone. The company must make itself more valuable to creators by providing them with the opportunity to access alternate sources of income.
Patreon should expand into offering corporate sponsorship opportunities alongside its individual sponsorship model. Under corporate sponsorship agreements, sponsor companies offer lump sum payments to creators in exchange for content introducing creators’ followers to their products or services. Influencer sponsorships are particularly effective, delivering a return on investment up to 11 times that of traditional forms of marketing. As a result, corporate sponsorships have become a significant revenue source for many creators.
For both creators and sponsors, navigating corporate sponsorships can be an arduous process. Creators must learn to balance the interests of their followers with the requirements of their sponsorship contracts, which can include stringent restrictions on their content. Sponsors, for their part, must conduct due diligence on the content creator to avoid reputational risk through the influencer association. The process of thoroughly vetting a candidate is no easy process, with 75 per cent of marketers saying that their most significant challenge is finding the right creators for their campaign. Furthermore, the problem is compounded by the fact that a single marketing campaign may have more than a hundred sponsored creators.
There is an existing market for intermediaries that simplify the sponsorship process by managing the relationships between content creators and companies. While the leader in this segment, Grapevine, has a user base comprised of more than 170,000 influencers, this company primarily focuses on the beauty and fashion industry, leaving opportunity for Patreon.
The Patreon Sponsorship Marketplace
On the new Patreon platform, companies would post sponsorship offers where creators could browse and apply for suitable opportunities. Patreon would streamline the sponsorship process by allowing users to easily filter information on creators and company requirements. This would address the problems sponsors face during their approval process and alleviate corporate concerns around brand and content fit. For example, a company looking to advertise a new gaming mouse may require that creators be producing video game-oriented content and have a minimum of 50,000 subscribers. This creator screening process would standardize the search, increasing efficiency and decreasing cost for sponsors.
Although this would be a similar model to competitors such as GrapeVine, Patreon would differentiate its offering through its unique user base. By definition, patrons are invested in their sponsored creators’ work. This investment would be tapped by allowing patrons to vote on their creators’ potential sponsors, choosing companies they would most like to see support their benefactors. This system would effectively match sponsors and creators that best complement each other, yielding greater value to sponsoring companies.
Giving patrons the ability to influence sponsor selection would add to the value of any sponsorship; patrons’ gratification upon seeing a creator acquire a sponsor that they recommended would be a memorable event. Their personal interaction and decision to cast a vote for a specific company would further help create a sense of affinity with the sponsoring brand. Corporate sponsorships on Patreon’s platform would establish a brand’s personality in a way that traditional advertising simply cannot.
Impact
Launching a corporate sponsorship marketplace would allow Patreon to significantly increase revenues. Assuming a mere three per cent of video creators secure a sponsorship, Patreon can expect 1,000 creators to benefit from the marketplace. With one to five per cent of creators’ fans typically becoming patrons and assuming fans account for 15 per cent of total audience, most of Patreon’s top creators have an implied audience of between 100,000 and 500,000 individuals. Given the per-video industry average sponsorship payment of $12,500 and that Patreon’s current commission is five per cent, the platform could realize $7.5 million in incremental annual revenue.
Patreon would need to take into account the potential for backlash from a perception of creators “selling out.” This risk is mitigated, however, by the fact that 89 per cent of millennials indicate they are mostly fine with short introductions featuring a sponsor. Assuming that a conservative 15 per cent of users abandon the platform following the implementation of this sponsorship marketplace, the platform would still gain $5.2 million in additional revenue, an over 30-per-cent increase in expected 2018 revenue. This conservative estimate does not account for sponsorship of non-video content creators; the ultimate financial impact would likely be higher.
By pursuing corporate sponsorships, Patreon and its creators would similarly benefit from the increase in income. These sponsorships would yield an ancillary benefit by increasing the average amount per transaction, decreasing the relative impact of transaction fees on Patreon’s creators. To further reduce uncertainty regarding these fees, Patreon could eventually use proceeds from the corporate sponsorship revenue stream to hedge, or even fully absorb, creators’ transaction costs. These favourable terms would make Patreon a more attractive platform for its creators, the main drivers of its revenue, and make its business model more defensible against larger content platforms such as YouTube.
Funding Growth
Over the past five years, Patreon’s commitment to putting content creators first has helped the company attract a strong user base of both creators and patrons. Entering the corporate sponsorship space solidifies this commitment by expanding the avenues through which creators can earn income and reducing the volatility inherent in transaction fees. Becoming the one-stopshop empowering creators and their craft will distinguish Patreon from the growing number of content-focused platforms entering the patronage space.