All of the following terms from Silicon Valley startup culture have direct analogues in the content-creation game. In the examples below, I’ll discuss a blogger or video producer who earns income via Patreon, but the principles generalize much more widely.
Product-market fit is when it becomes clear that a few of your random blog posts get more traction than all the rest — and that these few have something in common. Or when a set of your Youtube videos start earning a lot of positive comments revolving around a particular theme — and this set of videos has that theme in common. In short, it’s when you learn from data where your own autonomous creative tendencies (all your “product features”) intersect (fit) what people want (market). As with startups, this is one of the most crucial turning points in the lifecycle of a creative/intellectual endeavor on the internet. It’s not where amateur dabbling necessarily turns pro, but it is where amateur dabbling has an opportunity to turn pro.
Cost of acquisition (CAC) is the amount of effort/time it takes you to get a new patron. Consider the following example.
You publish one Youtube video per week.
You spend about 5 hours recording, editing, and posting each video
You gain one new patron per month
The cost of acquiring one customer — your CAC — is 4 x 5 = 20 hours. What is the value of your time? Estimate the highest hourly wage you could currently obtain from an employer. If the most you could earn per hour is $20, then you are effectively spending 20 x 20 = $400 to obtain one customer. Is that good or bad? Depends on how much you earn from a customer, and how much you value money relative to the intrinsic rewards of doing your work.
Churn is the rate at which your patrons cancel their pledges. Every content creator has some sense of how frequently they pick up new patrons, because picking up a patron is delightful (and Patreon sends you an email). But many content creators pay zero attention to how frequently patrons disappear. Losing patrons is sad, so we’d rather not pay too much attention (and Patreon does not send you an email). But if you are serious about succeeding as a content creator, you need to be as aware of your churn as you are currently aware of your rate of acquisition.
Simply put, if your churn is too high, you will never be able to go full time (at least not via Patreon). Churn rate is also a useful signal in the short-term because it tells you if your subscribed patrons are content with what you’re putting out and how you’re putting it out. If churn is uncomfortably high, that means it will be worth it to allocate time and effort to improving what you post exclusively for patrons, how often, etc. If churn is low, don’t waste time revamping Patreon and rather focus on public content that will acquire new patrons. There are surprisingly many ways to calculate churn. Here is the one that makes the most sense for content creators. To calculate your churn rate, take the total dollar value of all cancelled and decreased pledges in the previous calendar month, and divide it by the total value of all your pledges at the beginning of that month. For example, assume the following.
Between Sept. 1 and Sept. 30, two $10 patrons canceled and one $50 patron decreased their pledge to $25. That’s a total of $45 exiting your recurring revenue stream.
On September 1, you had $800 in pledges.
Your churn rate is 45 / 800 = 0.06. Multiply by 100 for a nice percentage figure: 6%.
You could do this for a few of the most recent months and average across them for a more robust sense of your churn.
Communications from Patreon staff suggest that the average churn rate is about 5%. (They say that’s a “healthy rate,” which I’m assuming means “average.”) You might therefore decide that a churn rate higher than 5% deserves your attention and effort, whereas a churn rate at 5% or lower does not warrant any increased effort on Patreon management.
If it’s not obvious, your growth rate has to be higher than your churn rate to succeed in the long-run.
The lifetime value (LTV) of a patron is the size of their pledge multiplied by the number of months they stay subscribed. If the average patron gives $5, and continues to give for 6 months, the average LTV is 5 x 6 = $30. This hypothetical content creator is not a promising startup.
However, this basic formula somewhat underestimates LTV if you plan to sell additional products or services outside of Patreon, such as books or courses. You might assume a 2-3% conversion rate, such that 2 or 3% of patrons will buy whatever additional products you sell later. If you make 3 courses for $500 each, and every patron has a 2-3% chance of buying, then you can add to each patron’s LTV 1500 x .025 = 38. In this example, your average LTV is really more like 68.
Communications from Patreon staff suggest the average amount of time a patron remains a patron is about three months.
The ultimate benefit of understanding and calculating these metrics is to gain an honest, objective picture of your project’s financial viability. Adding these numbers to your understanding might produce some somber insights about your project at first, but they all suggest viable solutions and even tell you how to prioritize and sequence your next steps: increase your planned products outside of Patreon, shift effort from retaining to acquiring patrons, etc.
Was this helpful? You should let me know because I’m not sure how many of my readers are interested in this stuff. If you are, I could say much more on this…