I’m fascinated by price increase communications.
Price increases are crucial for businesses, especially software. Software companies improve their products over a calendar year. The value exchange between the customer and the company is mismatched at the year mark. The customer is getting more value than when they decided to purchase.
This does not include the national Consumer Pricing Index that adjusts for inflation. The software business’s cost has increased because the dollar is worth less. Businesses must adjust to keep their margins and stay in business.
And sometimes companies do not do a great job with the price increase, communication, or overall strategy.
I like to analyze both but especially the ones that “flop.” I took a look at Drip’s price increase a couple of years ago.
And now, Gumroad increased prices with perhaps worse communication than Drip’s. We’ll see.
Table of Contents
Who is Gumroad?
Gumroad helps digital creators sell their work. They were early to solve the problem of creators wanting to sell their work online. Payment processing was hard back in the day.
And Gumroad made it easy.
- Upload your product
- Connect banking account
- Send their customers their Gumroad link
They used to be prominent in the music industry back in the day. No longer. They are focused on the creator.
They exploded during Covid. People had more time to create (or had to create to pay bills).
Gumroad launched Memberships towards the end of 2020. This helped them compete directly with Pateron and Substack.
Now, the price increase announcement
Sahil announced the price increase during their December quarterly call uploaded to Youtube.
He mentioned they’ve experimented with many pricing structures over the years. And will continue to do so.
The pricing announcement was short, maybe, 2-3 minutes of the 52-minute video. Most of the video was focused on product improvements and business metrics.
The main reason Sahil adjusted the pricing was:
- Make it easier to compute – flat fee
- Be on par with Substack and Patreon
Before jumping back into the product, he mentioned they’d send out the pricing update via email after the call. And they’d give everyone plenty of time before the pricing update went into effect (45 days).
Here’s a screenshot of the Gumroad price increase email:
Initial thoughts on the messaging
The email lacks the “why.” It’s also a bit blunt. The message does not need to be bubbly but it should include some empathy.
At first read, the increase doesn’t seem awful. They are going from 9% + processing fees to 10%. But as we’ll cover below, they have a good chunk of customers on lower fees due to their sliding-scale pricing.
Gumroad customers who’ve processed over $1,000 have a fee of 7% and those who have processed over $10,000 pay a fee of 5%.
Instead of linking to a +50 minute video, list out the biggest features you’ve added over the past year.
Let’s move to what the pricing was.
What was the pricing
Gumroad’s pricing was on a sliding-scale. The more you process through Gumroad the less your Gumroad fee.
Seems fair. And a nice incentive to process more through Gumroad as a creator.
The new Gumroad pricing removes the sliding-scale in favor of a flat 10% fee + processing fees (~2.9% + $0.30). This is not a huge deal for creators processing < $10,000 lifetime.
But it’s over twice as expensive to process the same dollars for those over $10,000 in lifetime earnings.
The issue they’re correcting for
Gumroad’s previous pricing used lifetime earnings instead of annual or monthly.
This means more and more customers were entering their unprofitable category.
Gumroad uses Stripe as a credit card processor. Stripe gives volume discounts but not huge ones.
So on the 2.9% + $0.30 of Gumroad’s biggest customers, they were maybe paying 2.4% + $0.30 (this is just a guess) to Stripe. This is not a huge gap to make money on.
(Nathan shared they pay 2.3% blended at ConvertKit.They use Stripe as well.)
And if more and more customers make it through the golden gates of $1,000,000, the less money Gumroad makes. Especially if new user growth slows and existing users continue to grow.
Gumroad’s financials
Gumroad is transparent. They run a public quarterly board meeting and publish their financials (see this Google Sheet).
Net Profit Margin started going red towards the end of 2021 and continued through 2022. This appears to be driven by a decrease in revenue and an increase in expenses.
Gross Profit Margin hovers around 36%. As the rule of 40 states, the revenue growth and profit margin should be at or above 40%. It appears they need to reel in some expenses and increase revenue (price increase).
Most of their creators make $1,000 or less per month. These creators are not affected by the price increase (31,134 creators as of Dec 2020).
There are 260 creators (as of 2020) who process >= $10,000 per month. These creators will lose the most due to the fee increase.
Remember this does not take into account the creator’s lifetime earnings which dictates their sliding scale fee. Some of the smaller monthly creators could have smaller fees because they’ve been on the platform longer.
Transaction volume spiked due to COVID and has continued to trend upwards.
Only Gumroad knows the transaction volume of the largest creators and if there is a problem with them leaving.
Competitors
Sahil mentioned increasing pricing to be in line with Substack and Patreon.
As of this writing, Substack charges 10% + processing fees (2.9% + $0.30) and Patreon charges 5-12% + processing fees (2.9% + $0.30).
Interestingly, these competitors are not on their original pricing page. Granted Substack is new but you’d think they’d add it to the old pricing comparison chart on the fly if it was driving questions from prospects.
Especially, when they added Memberships at the tail end of 2020.
Fallout on social media
Gumroad’s customers are creators and many have passionate social media followers. And they lit into Gumroad on Twitter upon receiving the price increase email.
For the rest of the day, Gumroad trended.
Creators were not happy. Some announced they were leaving.
There was not a lot of support for the price increase. And the email rubbed people the wrong way. The email lacked empathy and specific details supporting a price increase.
Customers were confused. They did not understand the “why.” Because they were not told the “why.”
Understandably the oldest and largest creators were the most upset.
Criticism
Thomas Frank, a popular Youtuber, joined Nathan Barry’s podcast the week following the announcement. Thomas is likely one of the biggest creators on Gumroad (he shares a lot in the podcast with Nathan).
Thomas was alarmed at the price increase, especially for his business. He was going from 2.9% to 9%.
Community advocating (Thomas Frank). This doesn’t include the credit card processing fees Gumroad passes on to their customers from their processor (Stripe).
Thomas was also disappointed in the lack of communication to the biggest creators on the platform. He’s talked about Gumroad on his channel because he likes the tool. And they have never reached out to further the relationship.
He compared it to Notion which is the gold standard for community building.
Competitors circling
Convertkit did not hesitate to capitalize on Gumroad’s failure. And nor should they. They are building a business and are passionate about the creator economy.
Nathan Barry started telling stories on Twitter and offering to help migrate creators. He understands how a price increase like this can dramatically affect a creator’s business. They led with empathy.
Convertkit emailed their affiliates with messaging to pull Gumroad customers to ConvertKit.
Marketing Examined broke down exactly how Nathan injected himself into the story on Twitter. It was natural and transparent. And very helpful.
A better strategy
We’ve covered how the price increase could have been better. But I don’t think the price increase was the correct strategy.
Instead, Gumroad should have (and can still) approach other payment processing gateways.
What’s a payment gateway?
A payment gateway is used by merchants to process credit and debit card payments from customers.
Migrate off Stripe
Stripe is a huge company. And they have cool and useful features for their businesses. They’re also easy to work with.
But they will only go so far with volume discounts. I know this from my previous experience at TheraNest. Our competitors used Stripe and we used a different gateway. We not only offered lower rates but we collected more upside.
It’s not all rainbows and unicorns. It requires Gumroad to do more work and own more responsibility.
Selling online is a commodity
Selling things online is not as hard as it used to be. Heck, creators can replace Gumroad with Stripe, Zapier, and Google Drive.
Gumroad’s value is building the payment infrastructure along with the product. They need to keep making it easy for creators to sell online but also help them retain more money. And 10% is far too much in my opinion.
Typically, the more transaction volume a processor like Gumroad pushes through the lower their processing fees are. They get more profitable overnight.
What’s next
I’d expect the Gumroad team to announce a change to the new fee structure before it goes into effect on January 31, 2022.
They’ll either reduce the flat fee or adjust the sliding scale.
Partnering with a new gateway will take time. They can delay by walking back the fee increase while they implement a new gateway and then onboard customers with a sweet package.
It also appears they need to get their costs under control as I expect their revenue to decrease regardless of if they roll the fee increase back. And the fee being in-line with competitors will likely slow growth as they are no longer the most affordable option.
The sliding scale was a nice incentive for creators. The more they sold through Gumroad, the more money they made. The incentives between the creator and platform were aligned. But it sounds like Gumroad was on the losing end of the deal as they were not profitable on the large creators’ transactions.