This week we’re getting meta by breaking down Substack’s business model. (For those that don’t know, I used Substack to send you this newsletter.)
Substack is a platform for independent writers to distribute subscription newsletters. The company makes this easy, even I figured it out.
The 1,000 True Fans Business Model
Business models can be like Rorschach tests. When I look at Substack, I see technologist Kevin Kelly’s 1,000 True Fans. The core of Kelly’s argument is that:
To be a successful creator you don’t need millions…To make a living as a craftsperson, photographer, musician, designer, author, animator, app maker, entrepreneur, or inventor you need only thousands of true fans.
The definition of a true fan is anyone who buys everything that you produce. Someone who owns every album a band put out or drawers full of Pittsburgh Steelers t-shirts. To be self sufficient, the creator needs two things:
First, you have to create enough each year that you can earn, on average, $100 profit from each true fan...Second, you must have a direct relationship with your fans. That is, they must pay you directly.
Earning $100 from 1,000 fans equates to $100,000 a year, which is a good living. This idea gets more interesting is its combined with internet assumptions.
The internet reshapes business rules, requiring an entirely new playbook. As tech analyst Ben Thompson notes, while the physical world is dictated by scarcity the digital world is one of abundance. For example, compare your local drug store to Amazon. One has limited shelf space, the other infinite. Additionally, geography and distribution are no longer constraints online. Returning to 1,000 True Fans:
If you lived in any of the 2 million small towns on Earth you might be the only one in your town to crave death metal music, or get turned on by whispering, or want a left-handed fishing reel. Before the web you’d never be able to satisfy that desire. You’d be alone in your fascination. But now satisfaction is only one click away. Whatever your interests as a creator are, your 1,000 true fans are one click from you. As far as I can tell there is nothing — no product, no idea, no desire — without a fan base on the internet.
There are infinite niches out there: the death metal fans, the whisperers, the left-handed fly fishers, and on and on. The internet allows these niches to connect, creating new opportunities. This is the wave Substack wants to surf.
The Scarcest Resource
Some of the largest online businesses are ad-driven business models like Facebook and Google. They want to maximize your time on site so that they can serve you more ads. The ad model, combined with algorithmic feeds has some negative consequences, like YouTube pushing users to more extreme content1.
Yuval Noah Harari, the author of Sapiens, argues that we should be cautious about free information2:
The idea of free information is extremely dangerous when it comes to the news industry. If there’s so much free information out there, how do you get people’s attention? This becomes the real commodity. At present there is an incentive in order to get your attention – and then sell it to advertisers and politicians and so forth – to create more and more sensational stories, irrespective of truth or relevance...We’re willing to pay for high quality food and clothes and cars, so why not high quality information?
The answer to that question will determine Substack’s success.
In a world of the infinite scroll, content is unlimited. However, time and attention are not, so filtering and trusting information are becoming more important and more valuable. Substack’s bet is that some people will get sick of empty calories from bottomless candy bowls like YouTube and will be willing to reclaim their attention.
How Substack Makes Money
Substack is a platform where writers can host and distribute newsletters. It’s free to publish but writers can elect to charge. Writers who charge set their own prices and are paid directly by their readers, satisfying the 1,000 True Fans criteria. Subscriptions can be monthly or annual, with annual subscriptions often offered at a discount. The minimum price is $5 per month and the most expensive newsletter is $7,000 per year. Most top paid newsletters charge between $5 and $20 per month:
The platform creates a direct relationship between writers and their audience and writers own their audience. Substack makes money by taking a 10% cut of subscription revenue. The company also takes out payment processing fees, which go to Stripe. At a high level, the business model looks like this:
The subscription model creates an incentive for writers to provide readers with as much value as possible. Contrast this to an ad model where the incentive is to maximize attention.
Below is a more detailed breakdown of Substack’s business model:
The company only makes money when writers make money. There are a few drivers: increasing the number of readers who pay for a subscription (free to paid conversion rate above), increasing the average number of subscriptions that paid readers have, or increasing the average cost per subscription. The best way for Substack to make more money is to have more writers producing more content that readers want to pay for. Incentives are aligned.
What Could Be Next For Substack?
Understanding Substack’s business model can help us guess at where the company may be headed. On one side of the platform, writers want to be connected with more readers who’d enjoy their work and they want more subscribers. On the other side, readers are looking for interesting, relevant content.
Because writers want a larger audience and readers want more good content, building discovery tools like a recommendation engine is likely on Substack’s product roadmap. The aim here is to help readers to find interesting content, similar to how Amazon recommends books or Spotify recommends music. Of course, discovery is difficult and this may become one a critical determinant of the company’s long-term growth.
Another likely item on the roadmap is bundling. According to CEO and Co-Founder of Coda Shishir Mehrotra3, the value of a bundle is in monetizing casual fans:
Returning to the 1,000 True Fans framework, the super fans above are Kevin Kelly’s true fans. They’re going to pay for whatever you create. If done well, bundling would help Substack and writers generate more revenue getting some casual fans to purchase bundles. While the company currently doesn’t support bundles, that hasn’t stopped writers from creating their own, like the Every bundle4.
Further afield, podcasting is another opportunity. Substack already allows creators to host and distribute free podcasts5. Typically podcasts are monetized through ads, typically from ZipRecruiter. Adding a paid subscription option would create a new revenue stream. Companies like Luminary that have tried building subscription podcast services haven’t found much success so far6, but like platforms like Apply and Spotify are leaning into the subscription podcast opportunity.
Making Herb Simon Proud
How much higher it can go will depend on execution, strategy, and luck. Facebook and Twitter aren’t going anywhere, but some consumers are starting to question social media and look for ways to regain their attention. Examples of this are downtime and screen time monitoring in iOS9 and the time well spent movement10. Some advertisers11 are taking a break from social media as well.
If these ripples could turn into a wave, Substack will benefit.
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Disclosure: The author owns shares in Apple and Facebook.
The Guardian, Yuval Noah Harari: ‘The idea of free information is extremely dangerous’, August 5, 2018.
Nieman Lab, We’ve finally got some hard numbers from Luminary (and they aren’t great), May 19, 2020.
Tweet by Hamish McKenzie, Substack co-founder, on February 4, 2021:
Apple, iOS 12 introduces new features to reduce interruptions and manage Screen Time, June 4, 2018.
The Verge, The leader of the Time Well Spent movement has a new crusade, April 24, 2019.
Mashable, Brand leviathan Unilever pulls ads from Facebook, cites 'polarized times', June 26, 2020.