#3 - How does the Creator Economy work? (Part I: Creators)

What are the secrets of successful creators?

Welcome readers! Every week or two, I write about the ideas, products, and technology that advance the creator economy. If you aren’t subscribed, join below to get new editions in your inbox 😊

This is the first of a 3-part series about how the creator economy works. The goal is to help you be more aware and intentional as a creator, fan, brand, or platform operator by understanding how the ecosystem works. Here are Part II: Fans, Part III: Platforms.

In this edition you’ll learn how creators fit into the ecosystem, how they make money, and what sets apart the best creators from the rest (spoiler: principle #2).

Let’s start with two general principles.

Principle #1: Creators are motivated by money, fame, and love.

Principle #2: Successful creators optimize for growing their business as efficiently as they can.

What defines the creator economy?

By creators, I mean people who make digital content and online services such as YouTubers, Instagrammers, Tik Tokers, writers (e.g. on Substack), educators (e.g. on Teachable), and adult entertainers (e.g. on OnlyFans).

An economy is an interrelated system of production, consumption, and exchange. An economy forms from the sum of human actions. In classic economics, trading (e.g. labor for money, money for food) improves standards of living. In the creator economy, interactions improve standards of living (effort for attention, money for access).

Creator economy, then, is the social science of the ecosystem comprised of decisions made by creators, users, and related businesses regarding their allocation of scarce resources, and the prices at which they trade various goods and services.

Flywheel of the Creator Economy

At the macro level, the Creator Economy is blowing up. There are 50M+ creators in the world, and an incredible 2M creators now make six figures. The core growth engine of the Creator Economy starts with creators. Shocking, I know. Here’s how it goes:

  1. Intentional creators make awesome content. They take entrepreneurial and creative risk to produce educational, entertaining, and informative content. They find ways to distribute it and reach relevant people. Often this happens on aggregations sites (i.e. content networks such as Facebook or YouTube).

  2. People consume the content, “paying” with attention. When the content is relevant and interesting, they value the experience or service. They engage with the creator and each other, and spread the word to their friends.

  3. This attention is monetized through ads, sponsorships, and other forms of value transfer such as virtual goods, tips, and subscriptions. The generated revenue is split among creators and networks, and accelerates the flywheel by:

    a) incentivizing existing creators to continue making content

    b) drawing new creators to produce their own content

    c) enabling content networks to improve their product offering (e.g. discovery mechanisms, creator tools)

    d) inviting more advertisers and brands into the mix with the promise of helping them reach more potential buyers.

So what are important aspects of the natural order that governs how creators decide to spend their scarce resources?

The Production Possibilities Curve (PPC)

The Production Possibilities Curve (perhaps Creation Possibilities Curve is more appropriate) represents the different combinations of outcomes using all available resources on two different goods that a creator can make. A point on the curve (blue) means a creator effectively uses all of their resources. A point inside the curve (orange) means they’re wasting resources (took a month off from creating content). Any point outside the curve (black) means it’s not possible given current resources.

The entire curve can shift outward — i.e. creation power increases — if the factors of production change. For example, a creator 1) gets better at making content, 2) acquires technology that makes creation easier, 3) hires/trades (e.g. pays $1000 for an editor instead of spending 20 hours of their own time).

Notably, with the magic of the internet, creators have the opportunity to amplify output and distribution while keeping their costs constant. An example (below) of this is using restream.io to simulcast to YouTube, Twitch, Facebook. By doing so, a live streamer can effectively change the shape of the Creation Possibilities Curve in ways not possible for traditional businesses where physical constraints apply.

All consistent creators get better at content production. Likewise, the confluence of new technologies (e.g. smart phones with cameras, connectivity, editing software, YouTube) benefit creators universally. While creativity and content quality are certainly differentiating elements, an all-important factor that sets great creator businesses apart from average ones is effective resource allocation (principle #2).

As a creator, do you use time, capital, labor to design and sell merch? Or do you put those resources toward a premium community space for your audience? These decisions can make or break creators. To effectively make the right decisions for their business, creators must master the principle of comparative and absolute advantage.

Comparative and Absolute Advantage

Absolute advantage means you can produce a greater number of a good than someone else if both of you put all your resources toward it. Comparative advantage is the concept that creators should specialize and produce the output with the lowest opportunity cost for them. In other words, lean into your strengths. (Opportunity cost: the most desirable alternative we give up when making a choice)

As their business scales, creators must focus on their zone of genius, aspects of the business that energizes them and requires their unique skills.

Let’s use a common scenario to illustrate this. “Should I hire an editor?” is an important question for any video creator. I’m not prescribing any specific answer, but freeing up time is of significant value for creators of all sizes.

So how should creators make this decision?

Let’s say Editor A and Creator B are both video makers (below), the orange curve being their respective Creation Possibilities Curves. B has absolute and comparative advantage over A at capturing raw footage. A has absolute and comparative advantage over B at editing videos.

In this scenario, Creator B and Editor A should team up to produce greater volumes of high-quality videos than either can on their own.

Even if Creator B’s editing skills became slightly better Editor A’s (right image, dotted curve), their best course of action would still be to hire/trade with Editor A. Why? Because for every unit of editing she produces, Creator B has higher opportunity cost than Editor A in the form of capturing raw footage. That’s comparative advantage.

Therefore, hiring Editor A would maximize the total output Creator B can produce, which gives her a better chance to grow. Remember principle #2: successful creators optimize for growing their business as efficiently as they can.

[Practical reality: For small creators who are reading, some of these concepts may make sense but feel impossible to act on when you don’t have disposable income. I know it’s hard. In the beginning, grinding is the only way. When you need help, it’s crucial that you’re creative in aligning incentives, and remember it never hurts to offer value to others first.]

Successful creators such as Valkyrae outsource their video editing so that they’re able to free themselves up to focus on creative planning, engaging with fans, and building her brand in ways only she can.

Similarly, some Twitch partners value editors so much that they give away 100% (!!) of YouTube AdSense income to their editors, who essentially run the creators’ YouTube channel by chopping 40 hours of live recordings into 20 minute weekly highlight reels.

Collaborating with others and efficiently trading her resources enabled Rae to become the fastest growing live streamer in the world. Coincidentally, she was crowned content creator of the year for 2020.

Collaboration: 1 + 1 = 3

Conversations with successful creators such as Valkyrae reveal a pattern. When discussing their path to success, they credit a combination of hard work, luck, and collaboration as the key drivers of their ascent.

For example, popular live streamers often attribute their success to being “raided” by a big creator when they were still small fry. If you don’t know what this means: here.

It seems that successful creators generally understand this creative arena is a positive sum game, not a zero sum competition. Going back to the comparative advantage concept, creators who want to scale can’t go the distance on their own. They must offer value and seek help from other creatives, and aid each other to collectively succeed.

More creators are recognizing this, and putting forth explicit efforts to be in proximity of each other so that there’s more opportunity for frequent collaboration. More of these projects such as Launch House are popping up lately.

Beyond collaboration with other creators, they must assemble a supporting cast of other talent such as editors. Here I want to call out the often overlooked but supremely important Moderators (Mods).

Mods

They are unsung heroes, the fanatics who shape and defend the bastion of the community, often for free. As creators grow, some want to turn audience (one to many) into community (many to many). Lots of these community are hosted on Discord, where the conversation is ever flowing, and good moderation needs to be ever present.

Mod candidates tend to emerge as the super fans who support creators with participation. They show up for every stream, they like and comment on every social post, and they participate in all the events that the creator plans.

Given how much they lean into the creator’s efforts, it’s no surprise that they’re willing to lend a helping hand ensure a positive setting for the community. When moderators are aligned well with the creator’s brand and goals, they add to the longevity of a community, which needs to feel safe, in addition to all the other good stuff (e.g. communal, interactive, lively). Creators who identify and recruit great Mods will have a much easier time sustaining a community.

Law of Diminishing Marginal Returns

As they scale out their business, creators get increasingly effective at making content. By hiring teammates, they can scale production even further. Like other businesses, creators should note the eventuality of diminishing returns. To drive this point home:

  • Creator + 1 Editor = Great.

  • Creator + 2 Editors = Good. Lower utilization of each editor, but maybe this helps the creator to produce more videos for more platforms

  • Creator + 6 Editors = Bad. Fewer videos are made. Too many cooks in the kitchen. They can’t align on creative direction. They push back on each other’s revisions. They fight over who uses what footage, and how money should be split.

Beyond diminishing returns on creation, creators must also look out for diminishing returns on satisfying consumer demand. Imagine a creator publishes YouTube videos:

  • Publish 1 video a week, get 1000 views.

  • Publish 4 videos a week, get 4500 views.

  • Publish 28 videos a week, get 7000 views.

What happened with these totally made up numbers? Without digging into “the algorithm”, a favorite topic among creators, here’s how to think about this:

1 —> 4 videos a week: As the creator ramped up consistency, she got better at making more videos. The better videos resulted in more distribution. Her other videos are recommended more through Home and Watch Next. More viewers visited her channel, finding her other videos.

4 —> 28 vides a week: She did get more absolute views, but views per video suffered. She may have lowered the quality bar. This is palpable for viewers who look for quality over quantity. She may have tapped out all viewer disposable time, and crossed into viewers’ “not interested” category relative to other content.

Meta-point: Consistency is good, extreme surplus is bad. Successful creators have a knack for awesome content, but they also need to track and understand their input / output. Knowing when an incremental unit of effort is better put toward content creation vs. something else (community engagement, brand building, sponsorship deals) distinguishes great creator businesses from mediocre ones.

Distribution, Law of Supply and Demand

The next part of the flywheel is distributing content to reach and engage with fans. This is where platforms and content aggregators come into play, but to keep this article at a reasonable length, we’ll hold off on this topic and revisit together with Demand, Market Structure, and Consumer Choice in the next editions. Let’s skip to…

How do creators make money? 💰

Short answer: Every way they can without impacting their brand or business growth. As they grow, smart creators diversify their revenue streams to de-risk against changes in their distribution pipeline (e.g. Facebook ranking changes).

To broadly cover the key revenue streams for digital creators:

Advertising

  • Ad supported content functions well at scale, and has a broad appeal to creators on platforms that share ad revenue (YouTube). Unfortunately, due to how ad revenue is generated, you need massive reach to survive on ad dollars alone.

  • Colin and Samir showed that with 5.6 million views on their videos, they received <$17K in AdSense income. They also illuminated how inconsistently views are monetized. They grew views 75%~ year on year, and quadrupled ad revenue.

Fan funding

Subscriptions

Merchandise

  • It’s unclear why merch is seen as a must-do. Huge creators like PewDiePie and Logan Paul make a lot on merch, but it results in low returns for most creators.

  • Graham Stephan made $1.6M the previous year, and then decided to push merch for many months. The result? He made $2,000. His takeaway: the opportunity cost of investing in merch is not worth it for him. Graham refocused his efforts (principle #2) and went on to clear $2M in 2020 from just YouTube AdSense.

  • Some creators establish a strong expertise or persona around specific goods through content. After doing so, starting a related product line becomes a good option. Emma Chamberlain’s coffee, James Charles’ make up exemplify this path.

Sponsorships / Brand deals

  • Brands are now leaning into emerging creators with moderate sized but fiercely engaged fans. There’s now a gaggle of marketplaces connecting creators with brands, with some focused on super-serving one vertical (SwapStack for Writers).

  • At anywhere from hundreds to tens of thousands of dollars for a single brand integration (e.g. one video), it can be tempting to take even questionable sponsorships — however, incongruous brand association hurts a creator’s longevity by deteriorating trust and community confidence.

  • Smart creators take a long-term view. Many successful creators turn down lucrative deals if the products do not fit their personal brand. But if creators and brands are well aligned, it can lead to mutually beneficial long term partnerships.

Others: Interactivity / Paid Content

  • These generally have some overlap with a few of the previous buckets.

  • Paid interactions — e.g. 1:1 coaching, meet ups, gaming together. Since this demands creator time and attention, it is normally viewed as unscalable. However, a creator I spoke with had a different perspective:

“It’s very scalable if you have Super Fans. You can keep raising the price if you provide enough value.”

  • Pay gated content — e.g. premium videos, members only live streams, early access to podcasts. This is interesting because similar to fan funding, it delivers results even if creators can only get a few thousand people paying.

Bottom line

Whether a creator is growing their business through Clubhouse or Tik Tok, entertainment or education, the laws of the creator economy apply.

Creators carefully manage their scarce resources and optimize for the best output they can produce. Successful creators allocate their time and money in ways that help them to scale. More often than not, this means making decisions about the right proportions of time dedicated to various parts of their business, and hiring / collaborating with others who have comparative advantage in key skills such as editing.

As the ecosystem rapidly changes, creators who adjust their creation strategy and resource allocation, and can move their audience from content consumption to taking actions, will have the greatest lasting power.

Special thanks to Steve Wu for contributing thoughts.

If you enjoyed reading, join the list ⬆️here so you don’t miss future installments.

Have questions or topics you’d like to learn more about? Tweet at me. Thanks for reading and see you next time!