Leanpub and Grandfathered Royalty Rates

Abstract

As many of you know, we’ve been iterating on our business model lately. We changed the royalty rate to 80%, added a number of monthly pricing plans to complement the $99 flat fee option, and then streamlined the number of pricing plans and added a free plan to become Freemium.

We’re happy with all of the changes that we have made. However, over the past couple of months, we have realized that we made one mistake. When we changed to the 80% royalty rate, we grandfathered every existing Leanpub book (not author) at the previous 90% minus 50 cents royalty rate. For various reasons, including PayPal fees, currency conversions, VAT MOSS and GDPR, this royalty rate is not sustainable going forward.

So, effective June 14, 2018, all Leanpub books and (almost) all Leanpub courses will have a royalty rate of 80%.

Furthermore, any Leanpub author who has earned [1] at least $500 in royalties by June 14, 2018 will have a free lifetime Pro plan, good for unlimited previewing and publishing of up to 100 books and/or courses. The details of our pricing plans are described at https://leanpub.com/freemium.

That’s it, really. The rest of this essay explains why we’re doing this in a lot more detail. Hopefully it gives you some more visibility into Leanpub’s business model. For people who like numbers, there’s a screenshot of a spreadsheet. For people who like words, there are lots of those!

Introduction

Effective June 14, 2018:

  1. All Leanpub books have a royalty rate of 80%.
  2. All Leanpub courses have a royalty rate of 80%, unless there is a signed contract already in place between us and a university. (That’s what the “(almost)” in the Abstract was about.)

This 80% royalty rate is already the rate for all books which were created after April 21, 2018. So, for these books, nothing will change.

For books which had been created before April 21, 2018, the royalty rate had been grandfathered to be 90% minus 50 cents. This royalty rate is changing to 80%. This change will affect all new purchases of these books made after 12:01 AM on June 14, 2018.

The monthly pricing plans for books and courses, i.e. Free, Standard ($8/month) and Pro ($12/month) are unchanged, and they are still good for creating up to 100 books and/or courses. The $99 flat fee option to create a book or course is also unchanged. The details of these plans are described at https://leanpub.com/freemium.

Furthermore, any Leanpub author who has earned [1] at least $500 in royalties by June 14, 2018 will have a free lifetime Pro plan.

This is not a change we are making lightly. We’re authors, and we’re creating Leanpub for authors. We had resisted changing our royalty rates for over 7 years, and we have resisted changing the grandfathered royalty rates as well. However, making this change is essential to Leanpub’s future.

Briefly, the reason we are making this change to royalty rates is that because of PayPal fees, VAT MOSS currency conversions (yes, plural) and GDPR compliance costs, our margins are just too low. This prevents us from investing enough in growing Leanpub.

Since we’re a bootstrapped startup, we’re funded based on our profits.

So, we need some.

That said, our 80% royalty rate is still much better for authors than the 70% that Apple pays, or the 70% or 35% (minus costs) that Amazon pays. (Amazon pays 35% royalties on books above $9.99 USD, and the average paid Leanpub book sale is over $14.)

This essay explains the details of this change, so that you can see why it is so important to Leanpub.

Consequences of Ending Grandfathering, to Authors and to Leanpub

Really, everything you need to know about why we are making this change is shown in the following screenshot of a spreadsheet:

Leanpub Royalty Rates and Revenue
Leanpub Royalty Rates and Revenue

The minimum price of a Leanpub book is free. At this price, the author earns $0 in royalties, both at the previously grandfathered royalty rate of 90% minus 50 cents and at the new royalty rate of 80%. (We were asked whether it cost the author 50 cents countless times with the previously grandfathered royalty rate, however. No one asks us what 80% of $0 is, so the new royalty rate is definitely a win for us here.)

The minimum paid price is $4.99. On a $4.99 sale, an author earns $3.99 in royalties, both at the previously grandfathered royalty rate of 90% minus 50 cents and at the new royalty rate of 80%.

For round numbers, let’s use $5.00. On a $5.00 sale, an author earns $4.00 in royalties, both at the previously grandfathered royalty rate of 90% minus 50 cents and at the new royalty rate of 80%.

Above $5.00, the new 80% royalty rate is a bit worse for authors and a lot better for Leanpub.

The average (arithmetic mean) price of a paid Leanpub book purchase is over $14. (Yes, really. This is over the lifetime of Leanpub, and over all non-free purchases.)

On Amazon, a $14 purchase would earn the author $4.90 at best. This is because over $9.99, Amazon pays a maximum of 35% royalties, minus download costs.

On Leanpub, with our new 80% royalty rate, a $14 purchase earns the author $11.20. This is 228% of what Amazon pays, or $6.30 better per sale.

With our previous grandfathered royalty rate of 90% minus 50 cents, a $14 purchase earned the author $12.10. Obviously, $12.10 is better than $11.20. Specifically, it’s 90 cents better.

So, a $14 sale is now 90 cents worse for the Leanpub author, and 90 cents better for Leanpub.

Now, the interesting thing is to look at the percentages:

For the Leanpub author, they are getting 92.56% of what they previously got. And, again, earning $11.20 on a $14.00 book sale is fantastic, and is more than double what Amazon pays. Leanpub provides a better service than Amazon or Apple, and pays way better royalties than either.

For Leanpub, on the other hand, this change doubles our revenue after our approximate PayPal costs. On a $14.00 sale, PayPal eventually earns about $1.00. So, after PayPal, with the grandfathered royalty rate Leanpub earns $0.90, and with the new 80% royalty rate Leanpub earns $1.80. So, when I said doubles, I meant it. It is literally twice as good.

Since the average paid Leanpub purchase is over $14, you can see why this is so important to us.

Tangent: PayPal Fees

If you’re familiar with PayPal, you may have objected to the above math a little bit. After all, PayPal’s fees are about 2.9% plus 30 cents, and there are volume discounts on the percentage.

However, note that I said “eventually”. It also costs us money to pay royalties to authors, which we also do via PayPal. PayPal offers two approaches here, the Payouts API and Mass Pay. The price varies for authors based in the USA, but for authors outside the USA, PayPal takes 2% of the amount of the payment (with a cap of $20). So, after earning 2.9% plus 30 cents, PayPal earns another 2% going the other way. It’s a great business.

For the lifetime of Leanpub, we have eaten the PayPal fees when we paid royalties to our authors in our monthly payments. We think this is fair, since otherwise we would be paying higher royalties to our US-based authors than our non-US authors. (We don’t eat the PayPal fees when an exception occurs and a payment must be made manually, since in those cases, it’s impossible to know in advance what the fee is.)

So, the way to approximate PayPal fees in our model is to say 3% plus 30 cents plus 2%, which is 5% plus 30 cents. On a $14 sale, that’s exactly $1.00. Yes, it’s a bit better than that for US-based authors, but the world is a big place, and we have many non-US authors.

Furthermore, since we’re Canadian, the PayPal math is actually even worse than this, because of the next thing…

Currency Conversions

We collect money in USD, and we pay our authors in USD. Thankfully, there are no currency conversions there.

However, there are many currency conversions involved in running Leanpub.

First, there is a forced USD to CAD currency conversion when withdrawing money from PayPal.

Yes, even though we have both CAD and USD bank accounts, since we are based in Canada we must withdraw funds from PayPal in CAD. So, PayPal gets to do a currency conversion, and earn a profit there.

We pay ourselves our humble salaries in CAD, but there are many things we do not pay in CAD.

For example, we pay AWS costs in USD, and we pay for all the services a web startup pays for in USD. (No, AWS doesn’t take PayPal.)

So, for these costs, there are two currency conversions: USD ⇒ CAD ⇒ USD.

Our margins already kind of sucked; these costs make them a bit worse.

But what makes them even worse than that is VAT MOSS, the first of the two EU-inflicted nightmares I’m going to talk about.

VAT MOSS

Since we’re Canadian, we follow the rules. Unlike many VC-funded startups, we have complied with VAT MOSS since the beginning.

So, for years, we have been collecting and remitting VAT on purchases from EU customers.

Complying with VAT MOSS has an entire set of annoyances involving collecting three pieces of evidence about the country of the purchaser, and ensuring two must match, etc. None of that is relevant here.

What is relevant is the flow of money:

USD purchase ⇒ CAD withdrawal via PayPal ⇒ Euro remittance to the EU via wire transfer

Yes, four times a year, we get to suffer two currency conversions: USD ⇒ CAD ⇒ Euro.

And unlike our AWS costs and other costs which don’t really scale with increased business, our VAT MOSS costs do scale with revenue, and a double-digit percentage of our revenue is from EU customers.

So, the VAT MOSS currency conversion costs directly make our margins worse.

Hilarious VAT MOSS Wire Transfer Tangent

When we send a wire transfer to the EU to pay VAT under VAT MOSS, we need to pay the bank fees to receive the wire transfer of the specific EU country (which will remain nameless) that we remit all our VAT under VAT MOSS to as well. Yes, if you just send the exact amount that you owe, the EU country (again, which will remain nameless) which processes the payment subtracts its own wire transfer fees from the payment, meaning that by paying the exact amount that you owed, you actually underpaid your VAT MOSS return.

But you cannot know what the wire transfer fees that the relevant EU country’s bank charges itself in advance.

What to do?

Simple: every 3 months when we send a wire to that unnamed EU country, we send them an extra 100 Euro, to ensure that there’s enough in the wire to cover the fees.

Now, you’d hope that they’d just keep the balance and apply it to the next payment, right?

Wrong!

After subtracting the wire fee, they then wire the difference back to you. And then our bank subtracts its own fee for receiving the wire transfer of the fee difference on the wire transfer that we sent.

Running a bank is a good business too.

And three months later, we get to do this again.

Now, if you think that VAT MOSS sounds fun, I have something extra fun for you…

GDPR

Basically, some people in the EU are mad at Google and Facebook. For good reasons, actually.

As a consequence of that, every internet startup in the entire world gets to pay for it!

Google and Facebook don’t care; once a year, they can send an executive to spend a day getting a stern talking-to on camera, and every few years they can pay a token fine.

I would talk more about GDPR, but every time I type GDPR I sort of start twitching uncontrollably.

The short version is that GDPR (twitch!) makes running a store on the internet kind of suck. So, it’s not something you want to do for terrible margins.

Heck, GDPR (twitch!) makes running anything on the internet suck, if what you’re running lets people communicate with other people.

Even Rage Against The Machine had to send out a GDPR email. Seriously.

A Parallel Universe

Canada has 10 provinces and 3 territories.

Imagine if Canada passed two laws:

  1. Every internet startup in the entire world needs to collect three pieces of evidence on every transaction, and store them essentially forever, in order to detect if a transaction is from a Canadian resident at home or abroad. If two of those three pieces of evidence do not match, you cannot do the transaction. You also need to charge different tax rates based on which province or territory was involved, and you need to check those for each piece of evidence. Oh, and there are special book tax rates, and special ebook tax rates, since some provinces or territories consider ebooks to be books, but most of them consider them to be not-books. (What are they then, sausages?)
  2. Every internet startup in the entire world needs to comply with our new Giant Dump of Poutine Repository law, which pretends to ensure that Facebook won’t influence our next election too much. Failure to comply will result in a (Dr. Evil voice) 20 million dollar fine, or 4% of global revenue, whichever is higher. Also, we’ll torture your executives and force them to listen to Nickelback and Celine Dion while treading water in a pool filled with maple syrup, angry moose and ravenous beavers until they drown.

Now, thankfully Canada didn’t do that. The governments of other countries would probably laugh, complain, or both.

In our universe, on the other hand, the EU has VAT MOSS and GDPR.

The Leanpub Business Model

So, running a store on the internet just got worse, unless you prevent people from the EU from using your store.

What to do?

Well, when we fly out of YVR, the Vancouver airport tacks on an “airport improvement fee”. Maybe we should do that to our EU customers? We could just stick a “GDPR Compliance Fee” line item under the VAT fee line item, and since VAT is so large, almost no one would bat an eyelash!

Nah.

We love our European authors and readers, and we actually love Europe in general.

We also sympathize: You need to pay VAT every day, and our own Canadian version of VAT (GST) is nothing by comparison.

So, we have complied with VAT MOSS faithfully from the beginning, and we are also complying with GDPR. We have a Data Protection Officer (dpo@leanpub.com), and all that good stuff.

But all this crap does make our margins worse, and they were low enough to begin with.

Now, at the new 80% royalty rate, our margins will be fine.

However, we’ve spent years building up a base of authors and books at the grandfathered royalty rate. At that rate, because of the four horsemen of PayPal fees, currency conversions, VAT MOSS and GDPR, the Leanpub store is basically a non-profit.

We could just rely on new customers who get the 80% royalty rate to provide the profit. However, this will take a long time until new customers represent the majority of the Leanpub store revenue.

We could also just run the Leanpub store essentially as a non-profit for the benefit of our paying members. This is basically what Costco does, and that’s a great business. However, it relies on membership fees to make the profit. (Costco makes almost all their profit from membership fees, not from huge TVs.)

But we just grandfathered all our authors who have earned at least $500 into a free Pro plan! So we’re not going to be earning a bunch of fees from them, either. That’s good, by the way: we are grateful for the support our authors have given us over the years, and want to show our appreciation with something.

So, if we essentially didn’t make any money from existing customers, we’d need to make it all from new ones. Given enough time and growth, this will be basically true, but we need to have the cash flow to get there.

By the way, the switch to Freemium is going very well so far. Signups are way up, we’re still selling some plan upgrades, and even some flat fee purchases. So, we expect that Freemium will get us the author growth we need, and provide more authors to upsell into paying plans. We’ll even sell them some shelf spots, and, of course, it will also fuel marketplace revenue growth.

More importantly, having more authors will make the flywheel of readers ⇒ authors ⇒ published books ⇒ readers ⇒ authors ⇒ published books turn faster. (Since our flywheel involves writing a book, we probably have the world’s slowest viral loop–which is not something you want to put in a pitch deck!)

All this does mean, however, that we can’t run the marketplace as a non-profit–either for existing customers or new ones.

By switching to Freemium, we are sacrificing thousands of dollars in monthly revenue from flat fee book writing purchases. This is an investment in the future, but the missing revenue does have to be made up from somewhere. And since we’re bootstrapped, that somewhere isn’t “ask mom and dad for more allowance”–i.e. raising another round from the investors. We need to attempt to earn that revenue from our customers, both new and existing ones.

We’re Not Entitled

We are not entitled to any of this revenue. We need to earn it. We are confident that we will, but this is not something we think the universe owes us. We need to provide a service which is worth the money we charge, either in up-front cost or in a percentage of marketplace revenue.

With our amazing support, our elegant storefront, our great royalties, our variable pricing feature (the best kept secret of Leanpub is how much extra money the minimum and suggested price sliders have earned for our authors!), and our incredible book publishing workflow, I am confident we will earn this revenue.

But we do have to earn it, every day, from our customers. If you don’t think we’re earning it, please email me at peter@leanpub.com.

We’re Actually Grateful

This essay might have sounded like a lot of complaining. Frankly, that’s because it was a lot of complaining. Every now and again it’s fun to complain.

If you can’t enjoy complaining, 2018 is a hard year.

But we’re actually incredibly fortunate. We have tens of thousands of amazing authors and over a million wonderful readers.

We are building Leanpub to be the best way in the world to write, publish, sell, buy and read or take in-progress and completed ebooks and courses. That’s an expansion of the original vision, and it’s only possible because of the success that we have already had.

This success is due to amazing support of our authors and readers, and the hard work of our talented employees.

We got through the launch of GDPR compliance, just like the launch of VAT MOSS compliance years ago, and we’re better for both of them.

You need a little suffering in life. Thanks, EU!

Arguably, both of these things actually help us, since they’re barriers to entry. We’re clearly not incumbents in the Google or Facebook sense, but we’re not total novices either. So even though, from a technology perspective, it’s easier and cheaper to launch an internet company today than ever before, things like VAT MOSS and GDPR make it worse.

What’s Next?

Hopefully for the rest of 2018 it’s just executing the vision. To me, what’s most exciting about this is that everything is coming together. Finishing courses, finishing Markua, etc.

Sure, we’re starting some things too, but even most of those things have been thought about for years. The one thing that’s the most out there that we’re doing is something we have an intern working on right now, and even it’s going really well. (Elon Musk isn’t the only person in the world who can hire interns and give them cool projects to work on.)

So, GDPR or no GDPR, we’re really excited about the future.

We want to thank every Leanpub author who had been grandfathered for their understanding about the royalty changes. Hopefully the above explanation makes the rationale behind them make sense.

We need to make money, to make Leanpub better for you. It’s that simple.

As always, I am personally incredibly grateful to our authors and readers, and to my co-founders and our employees. There have been more business model changes in the past 8 months than in the past 8 years. Thank you for sticking with us.

These changes will help us grow Leanpub even faster in the years ahead, and build a better Leanpub for all our authors and readers.

Peter Armstrong

June 1, 2018


Update July 25, 2018: Obviously this affects bundles as well, since bundles are just groups of books which are sold for one price.

[1] Update June 6, 2018: We changed “been paid at least $500” to “earned at least $500” to not exclude people who just cross the free Pro plan threshold between June 1 and June 14, and since people had misinterpreted “been paid” as “earned”. So, to be clear, if you have earned at least $500 in royalties across all your books by 12:01 AM (UTC) on June 14, 2018, you will, at our discretion, have a free lifetime Pro plan. (I say “at our discretion” since the purchases need to be real purchases from other people, not self-purchases or fake purchases which are subsequently refunded, etc. We’re trying to be nice and give out a reward to the authors who have supported us over the years, but we don’t want it to be gamed.)

Update June 4, 2018: Minor edits clarifying what a Pro plan is, for authors who hadn’t been following the evolution of our pricing plans.