[DISCLAIMER: I am not and have never been a licensed representative or Certified Financial Planner for any financial institution or investment organization. In other words, do not use this post — or any other post by anyone without the proper licenses and certifications — as financial advice. Seek out people who are being paid to work in your interests and know what they’re doing.]
A note on changing circumstances
When I started writing this, Patreon had announced a change to their fees. The change was so significant that both creators and fans were extremely upset, and as we’ll explain, they had good reason.
Today, Patreon announced they’re not rolling out the fee change. They also sent email to fans offering an easy way to resubscribe to any creators they’d dropped due to the change.
Obviously, that changes my original conclusions a bit.
Some investing basics
Here are some observations from a reasonable career in Finance (as a tech support specialist and UX Designer) regarding Patreon’s previous and current fee structures.
First, some basics.
A stock is a share (or shares) of a company. There are only so many shares of stock for each company, and when you buy shares of stock, you buy it from someone else who already has it. That part isn’t important to our conversation.
Stocks can be purchased (or sold) at any time while the market is open, but every time you buy a stock, you pay a) the money for your shares and b) a commission to whatever stock broker you’re using as a middle man. That part is important our conversation.
So stock is like cheesecake. When you buy a piece of cheesecake, you get one layer of solid cheesecake, maybe decorated by some fruit or something. You’re paying only for one solid thing: cheesecake filling. But you’re paying $5 for the slice of cheesecake and then another $1 to the cheesecake broker for finding you the cheesecake and selling it to you.
A mutual fund is a package of stocks (or other securities) sold as a unit. When you buy shares of a mutual fund, you’re throwing your money into a pot with all of the other investors of that fund. Together you and the other investors are buying into a large sums of securities from a plethora of companies, all of which the group of investors now owns. Most mutual funds “follow” a market’s performance or aim for specific goals, whether it’s “look like the Dow Jones Industrial Average” or “make the most money physically possible in the Health Care sector” or “stay consistent and conservative because everyone putting money in this fund is planning to retire in 2020”.
So mutual funds are more like a rainbow layer cake. You’re paying $5 but you’re not getting one solid filling, you’re getting much smaller amounts of 5 different fillings (or more!)
Mutual fund transactions are a bit different from stocks though, because to price them, the mutual fund advisors:
- gather all the day’s money and pool it together
- take out the very small percentage they need to run the mutual fund
- buy (or sell) the appropriate investments to meet the fund’s goals until they don’t have any cash left
- update the prices of the mutual fund shares based on the prices of the underlying securities and the number of shares of the fund.
When you buy a mutual fund you say “I am buying $5 of whatever this cake has in it is giving out” and you get $5 worth of cake. Whether that’s a big slice or a little one depends on whether the layers in the cake are worth a little money (so your $5 goes further) or a lot of money (so your $5 doesn’t go as far).
Why mutual funds are successful
Mutual funds are so handy and so successful precisely because people are pooling their money to do things. The reason why the fees are lower is also because people are pooling their money to do things.
Say that eight people want cheesecake: if they each buy slices individually, they’re going to pay $6 a slice ($5 for the the cheesecake and $1 for the cheesecake brokerage fee) to get a whole cheesecake. That’s $48, only $40 of which goes to the cheesecake maker. The cheesecake broker makes $8 in fees.
If those same 8 people pool their money in advance, they pay only $5 a slice. The cheesecake fund advisor takes $1 for the order, and $0.10 as an administrative fee. She gets paid based on how well she chooses the cheesecakes to buy, but her expenses are stated up front and everyone knows that as long as cheesecake costs $5 a slice the fee will be a dime.
That means that instead of buying 8 slices of cheesecake, the eight hungry people can afford to buy 9.4 slices of cheesecake for $48. So everyone who pooled their money gets one slice and an extra bite of cheesecake. The cheesecake seller gets $47 instead of $40. And the cheesecake fund advisor is getting paid less than the cheesecake broker, but certainly enough to live off of comfortably and cover expenses.
So, the best “bang for the buck” when investing is to pool money with other investors, across a wide variety of investments, in order to maximize investment while minimizing fees.
How’s Patreon doing at that money-pooling thing?
What it’s been until now
Patreon is a service that, according to their homepage, “allows [creators] like you to get paid by running a membership business for your fans”. It is literally about people pooling their money to invest in artists/writers/musicians/etc so that person (cheesecake seller) can afford to produce their art (cheesecake) and gain a salary from it.
If you’re a Patreon member, you choose which artists you want to invest in and pool them together so you’re essentially designing your own rainbow cake / mutual fund / portfolio of artists to support.
Let’s look at Patreon’s fee structure prior to the most recent announcement with a hypothetical scenario. As a fan, I built a “portfolio” of creators I wanted to support, and I could break up that portfolio in a number of ways. Let’s say I chose to invest in 6 creators, and I chose to give one creator $5 and 5 other creators $1 a piece. That’s a total of $10.
Like a mutual fund investor, I contacted my broker, Patreon, and say, “I’m in for $10.”
(Note: Everything from here down is me running math based on Patreon’s fees from the announcement article previously cited, which are unclear in specifics precisely because fees are complicated things to manage.)
Patreon then pulled $10 from my account once a month, and deducted my transaction fee of 2.9%+$0.35, which totals about $0.64. That’s similar to the $1 our mutual fund advisor needed to buy the cheesecake. Once that’s removed, there’s around $9.36left, which divided across the creators fairly means my $5 creator grossed around $4.65 and everyone else grossed $0.93.
Then Patreon took takes their 5% service fee off of that (probably, I’m not sure of the order) so my $5 creator netted $4.41 and the rest got around $0.88 a piece.
In short, we’re buying rainbow cake.
Sounds small, but multiply it by even 100 patrons per creator and you’ve got $88 bucks going to the small creators and $441 going to the big one. That’s the kind of money that takes care of gasoline bills, a prescription, or even the heat or electricity bills.
newly-announced now-cancelled fee structure
For various reasons, Patreon recently decided that instead of selling me a slice of rainbow cake, they wanted to sell me six individual slices of cheesecake. They wanted to sell me those six slices of cheesecake not all at once, but on the anniversary of whatever day I signed up to buy cheesecake, so a couple of them could all land on the same day, and a couple more could be scattered throughout the month.
And because they would have charged me on different days for different slices, I would have lost the market forces that came with pooling my money. I would have owed brokerage fees for each individual slice of cheesecake, instead of paying once for the whole rainbow cake.
Now in their defense, it’s not a 100% parallel to stock. After all, if Apple’s selling their cheesecake for… checks the market… $162 a slice, then the smallest amount I can buy is a single $162 slice, plus brokerage fees. In Patreon’s world I can still provide patronage to a creator for $1 a slice, and receive a $1 slice of cheesecake. In fact, they ensured us that they were being generous because that $1 slice of cheesecake netted the creator $0.88 (by my math) under the old fees and $0.95 under the new fees. For a creator with a big enough audience, that could have been significant.
But before the change, Patreon charged a transaction fee of 2.9% + $0.35, and it was considered part of the cost of my $10 in cake (baked in, if you will). Under the new fees, I would have paid 6 transaction fees across the month (whether all my transactions are on one day or not) and each one would have cost me 2.9%+$0.35. Before, the monthly pledge was $0.29+$0.35, which is $0.64. After the change, it would have been roughly the same 2.9% across the 6 transactions, but the $0.35 would’ve multiplied by 6, so that’s $0.29 + $2.10, or $2.39 in fees, an increase of $1.75.
And like stocks, these are fees on top of the perceived cost of the product. If I wanted a $1 pledge, it would have cost me $1.37ish. So what cost me $10 out of pocket in the old world, with the creators getting around $8.81 of that, cost me $12.39 in the new world. The creators meanwhile get a raise from $8.81 to $9.50, which frankly is a lower number than $2.39.
By switching to a broker-fee model like stocks where I would be responsible for both the transaction fees and the cost of the cheesecake, Patreon would have significantly upped the amount of money coming out of my pocket over what it cost me to buy the mutual-fund model of rainbow cake.
This not only really made the fans paying the artists unhappy, it made the artists even more unhappy. The general assumption from creators in my twitter feed has been the existing fees were a cost of doing business necessary to ensure transparency in what was leaving the fans’ pockets. After all, receiving $0.88 is still $0.88 higher than receiving $0, which is what they were getting before Patreon was invented.
We are not asking them to be a charity: we are not asking them to absorb the processing fees themselves. But it is only right and proper that someone who pledges $1 pays $1. Let us handle it, as we have been doing, and keep the wide well open.
— Seanan McGuire (@seananmcguire) December 7, 2017
Why are people so mad about the fees?
Fans were mad because their $10 bill just jumped to $12.39 (Or higher!)
If $10 is all I could afford, as a fan, I would have to choose which creators I’m going to stop supporting so I could get back down to within my budget. I might have done that by dropping two $1 pledges, which took my total from $12.39 to somewhere closer to $9.69. Or I might have done it by dropping my $5 pledge, which took my total owed to way under $10, but still didn’t buy me the comfort and enjoyment I had before.
I may have lost access to content I enjoyed, or special perks, since each of the pledge levels generally has something else associated with it.
In either of those cases, one or more of my creators went from at least $0.88 on the dollar to zero while the other creators netted a couple extra pennies, and someone who collected transaction fees got a whole lot more of my money than they used to. Whoo. I am soooo glad I made that trade-off. NOT.
Because the announcement came out of the blue and only gave me a few weeks to decide what to do about my support, the announcement probably stressed the hell out of me. Its timing over the December holidays, when many Americans are overextending their budgets anyway, was a shitty thing to do. Many fans feel guilty for dropping their pledges, and angry that Patreon forced them to do so. A significant amount of trust in Patreon was shattered. A not-insignificant portion of Patreon’s users have left the market altogether.
It’s worth remembering that fans don’t have a wide assortment of options for supporting creators. Patreon was legitimately one of the least expensive and most robust options.
In the not-Patreon world of investing, you can buy the slice of cheesecake from anyone who participates in the market. If you don’t like the cheesecake brokerage fee from one company, you shop around until you find a broker that charges lower fees, but everyone’s selling the same slice of cheesecake.
In the Patreon world of investing, most creators don’t have the time, money, or energy to set up dozens of competing revenue streams — they’d rather be creating and may already have full time jobs as it is. If you want the Seanan McGuire slice of cheesecake, and she sells her cheesecake only at Patreon, that’s where you shop.
But it’s also really hard on the creators themselves. We received very little warning about the change, only a few days at most. We were given no choices regarding whether we wanted to adopt the fees. And there’s a significant cost in time and money to switch to a different “broker”. Even if it wasn’t the one time of year when most creators are tearing their hair out trying to meet holiday gift requests it would be an insane amount of pressure to either swallow the new fees or move to a different platform altogether. The timing just painted Patreon’s decisions in an even poorer light.
And once the announcement went out about the fees, fans started leaving in droves. Some left because they couldn’t afford it, some left because they were mad as hell. Both voted against Patreon’s changes with their wallets, but it’s the creators who took the worst of the hit. There are reports of creators losing as much as $600 a month. That’s anything from the purchase of two 5,000 word fantasy stories at going professional rates to rent, depending on what kind of creator you are.
So Patreon’s choice to switch from a mutual-fund-ish model to a stock-ish model hurt both fans and creators. It not just hurt them, it insulted them. In many cases, it priced people out of the market altogether. It said:
- If you can’t afford to pay multiple fees every month, you can’t afford to support your favorite creators, and we don’t want you here.
- If you can’t afford to lose your lowest tier ($1/month) patrons who can no longer afford our fees, you can’t afford to be a creator, and we don’t want you here.
So what happens now?
Patreon’s fee change would have moved from an anyone-can-invest mutual fund platform to a must-be-savvy-and-well-off brokerage platform.
That was their original choice, and they recognized today it was a bad one. Had they stuck with their original choice, it would have opened up a hole in the market for nimble companies who want to move in to the mutual-fund-as-patronage-model space.
When we invest in things like our 401ks or IRAs (or investment account of your choice outside the US), we generally do so in mutual funds. We build businesses by investing small amounts in a diverse set of businesses that are each layers in our rainbow cake. Small business become medium or large businesses because of these tiny investments that are pooled across thousands of people.
Patreon provided that same model for us to spread small investments across multitudes of creators and help them grow. No one in the arts starts out as a huge success. No one is born a bestselling writer or a million-dollar artist or even as a top-tier chef. We know that as creators and we know it as fans. But now the Patreon model is gone, replaced by a model that requires both creators and fans to have reached a modicum of success outside the platform before they’ll be admitted.
Both creators and fans want to support fellow creators and fans. We seek out the ability to efficiently throw a couple of bucks into the hats for the dozen buskers that might or might not someday make it big, knowing that we might be partially responsible for that one violinist who moves from the subway tunnel to the recording studio. We want to enjoy their work when they’re small and when they’re big. But we want to do it in ways that we can afford, which means we must have a market with a low point of entry on both sides of the artist/patron divide.
So where does that leave us? Even after pulling back their changes, I’m predicting it leaves Patreon with a lot of rebuilding to do and it leaves a lot of creators looking for other markets. The damage to Patreon’s reputation is pretty high.
I’m also predicting that at some point, someone will found a company whose charter is “Be the mutual fund company of crowdsourcing” and their mission statement will be to help both fans and creators, at even the lowest of price points. Maybe that company will be Patreon, in an effort to recover. Maybe it’ll be someone else. Whoever it is, when that company gets on their feet, they will change the world… and we can have our cake and eat it too.