Rowyn (rowyn) wrote,

Patreon Makes Itself Irrelevant

I've talked about this a lot on Twitter, and I want to organize my thoughts into a single journal entry.

On Wednesday, Patreon started to email creators and patrons that they were changing their fee structure. First, they were increasing their transaction fees from "once monthly for all pledges" to "once per pledge". Second, they were going to stop charging transaction fees to the creators and start adding them to the patrons' bills.

This effectively ended Patreon's relevance to the microtransaction problem.

The "microtransaction problem" is that there is no good long-distance way to pay someone a dollar. Small transactions take as many resources as large transactions, so payment processors, whether they're credit cards or Paypal or a bank, often charge a flat fee per transaction.

Patreon's old model solved this problem by aggregating all the pledges a single patron made, and thereby paying one processing fee for all that patron's pledges. They then split the cost of that single processing fee across all creators that patron supported. Patreon also charged a flat 5%, which was to cover the cost of the service Patreon provided. This meant that what fraction of each pledge a creator received depended on the how many other creators their patrons patronized. For instance: if a creator had a patron who pledged $1 to them and had no other pledges, that creator would get 60 cents of the $1 because there was no one else to split the fee with. If one patron pledged $1 each to 30 different creators, then the transaction fee on $30 would be $1.22 split across 30 people, or 4 cents each. Each creator would get 91 cents of the dollar pledge. So creators' take-away was a variable number. According to Patreon's own post, creators got 85% to 93% of their pledges. That appears to be an "on average", since I spoke with one creators who'd had only one pledge for $1 in their first month, and they only got 60% of that dollar.

Under their new model, Patreon plans to bill separately for each pledge, instead of grouping them all together. They are also adding the transaction fees to the pledge: 2.9% + $0.35 each. So a patron pledging $1 each to 30 creators will now see 30 charges of $1.38 each on their statement from the credit card/Paypal/whomever, instead of a single $30 charge. Since the new model doesn't pass transaction fees to the creator, the creator gets exactly 95% of the pledge.

I have seen a lot of people argue that Patreon made this change because they were previously losing money on transaction fees. As far as I can tell, this is not accurate. They're changing from a model of "we aggregate charges to minimize processing fees and split whatever processing fee there is between creators" to "we do not aggregate charges and we pass the resulting higher processing fees to the patron".

Initially, Patreon attempted to spin this as purely a benefit to the creator: "We're going to give them 95% of all pledges! More money for them!" But on low-dollar pledges, most creators will now receive a lot less of the money their patrons spend. A typical creator might have gotten 85% of money spent on $1 pledges before. Now they get 70%.

That 5% for Patreon plus 2.9% + 35 cent transaction fee on every pledge amounts to a 45% surcharge on $1 pledges. It's big, and it stays at more than 10% until you get to single pledges of $15 or more per month.

On Thursday, Patreon amended their post to say they are no longer aggregating the pledges because they want to fix the problem of "patrons start a subscription after the 1st of the month and then cancel it before the start of the next month, in order to receive the monthly rewards without ever paying the fee."

I want to be clear that this is a real problem that Patreon wishes to fix. You can see it in action at Graphtreon. Note how pledges rise sharply throughout the month and then crash horribly on the first? A lot of people are bailing the day before they are billed.

Graphtreon also shows how bad this move was for Patreon's subscription rate: instead of getting a smooth upward climb for December the way there was for prior months, we get a smooth curve through the 6th --- and then it falls on the 7th, the day after the news hit.

It's not clear why Patreon decided de-aggregating the pledges was the best fix for the cancellation problem. It is clearly not the only fix: they could do pro-rated charges for a fraction of the first month, or do a full charge for the 1st month and then pro-rate the second month (which is a little confusing to the consumer but probably the ideal solution). Either way, they'd still be able to aggregate subsequent months and minimize transaction fees.

One person hypothesized that Patreon doesn't want to be regulates as a money-services provider, and that aggregating and disbursing funds as they did was too much like one. I don't know enough about the relevant law to tell whether or not this matters. It seems a little weird for it to be, since that would kind of make, say, Amazon a money-services provider every time I buy multiple e-books by different publishers in one transaction. But laws and regulations are weird things, so maybe.

It's also unclear why Patreon decided to pass the increase in transaction fees on to the patron. This looks like a particularly bone-headed move from a tax standpoint, because the creator is a business owner who can write off the transaction fee as a business expense, and the patron can't. Maybe this route allows Patreon to get the tax write-off themselves? I don't know, but it seems unlikely that it changes Patreon's tax equation. Regardless, all the creators I've talked to would rather have absorbed the higher fees than made their patrons do so. If this was a PR move because Patreon thought patrons would be less price-sensitive than creators: huge miscalculation there. Some creators would have chosen to fume quietly about it rather than causing a public uproar, but this method meant Patreon had to contact all their customers and FOOM. Now everyone's mad at them.

I'd like to note that while I think it highly unlikely that Patreon was losing money on transaction fees, that is not the same as saying they weren't losing money on small-dollar pledges. It may be that Patreon wants to drive off the small-dollar pledges because they consider them unimportant to their business model and more costly in terms of bandwidth/customer service/something else than they are worth. Patreon may want to focus on only creators who want pledges of $15 or more. Whether that's right or not, this article makes it clear that
Patreon wants "financially successful" creators who bring a large fanbase with them before they launch on Patreon. Conversely, they want to drive low-earning creators off their platform.

This isn't a very effective way of accomplishing either of those particular goals, however. Increasing the per-pledge fees doesn't target specifically creators who make a small amount OR patrons who don't pay much to Patreon total. It hurts the creator who makes $10,000 a month on 9,000 pledges a lot more than the creator who makes $30 on 2 pledges. It hurts the patron who donates $100 a month to 50 creators more than the patron who donates $15 to one. It's targeting pledge size. And per Graphtreon, Patreon's biggest creators do not have average donors of $15+. The ones who don't have their income hidden largely make $5 or less per patron.

However interesting Patreon's stated or possible reasons for the change may be, bottom line: they are not likely to change course now.

For creators who use Patreon as a tip jar for their work elsewhere, Patreon is all but pointless now. You might as well use Paypal, because it's cheaper. Creators who use Patreon's ability to provide locked content to incentivize donors have a harder problem to solve. But I suspect we're going to see people working to solve it again.

I've cancelled all but a couple of pledges through Patreon already, and my last two will go before the end of the month. I will find other ways to support creators (and in three cases, already have). For me, Patreon doesn't bring enough value for what they now cost, and I want to vote with my wallet on the matter. I never had a Patreon myself, so it doesn't affect me as a creator.

The things that annoy me most about it now are Patreon's terrible messaging on the subject, and that they rolled it out in December. Seriously? "We're chasing off half your customers, creators! Happy Holidays!"


This entry was originally posted at Please comment there using OpenID.
Tags: business of writing

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