The ‘tip jar’ business model— explained

The creative industry that consists of people who make arts, crafts, music, design, fashion, film is one of the oldest known businesses that has transformed and adapted to the changes in the economy. During ancient times, a creative person worked in the court of a lordship to write literature, compose songs, make artworks about their prowess — things that made the lord happy. The lords supported their works with generous grants of money that helped them continue creating content for a living. Affluent aristocrats, religious leaders supported creative persons to help them spread their ideas. These circumstances have changed a lot with the invention of the printing machine, mass commercialization of creative business, and the internet. The most recent trend in the creative industry is the tip jar business model that has given the liberty back to the creative minds, making the twenty-first century — the best time to be alive as an artist.

Tip jar business model is a metaphor for new age internet businesses where creators make money from direct contributions of their patrons.
 Photo by
Matthew LeJune

Before the 1400s, a musician was only known to the people in the city he or she lived. It is tough to transcribe music notes by hand. One must visit the musician in person or make them travel across cities to enjoy the music, as is the case with artists. The invention of the printing press changed that. The printing press helped music notes to be copied multiple times and distributed to other cities. Creativity spread across the boundaries of land and water.

Aristocrats in other towns bought the printed notes, hired musicians and instruments to play the music. It was the only way to enjoy classical music at that time, an expensive affair, only a few elites could afford. The evolution of printing machines also gave birth to a new art form, comics. Comics democratized the illustration art with satire, caricature and inventions like speech bubbles. The speech bubble empowered the artworks to ‘talk’, an ability that was missing all along.

Record labels along with radio broadcasting emerged in the early 1900s, disrupting the music industry. Record label businesses made agreements with artists to produce, advertise, and distribute music content. The terms of agreements determined how much the artists will earn on the music, but they did not own the content. This arrangement made musicians very popular across continents. The record labels sold rights to radio broadcasters which for the first time brought middle and low-income people to listen to opera and big band music.

Meanwhile, the record label industry was consolidated with very few companies holding much of the market. Few unhappy musicians ventured out to create independent label companies that gave more freedom to the artists. As more people started listening to music, the diversity of the content produced also expanded.

The internet took over the music industry by storm in the late 1990s. Piracy became a massive issue as people preferred downloading songs for free than paying for records and cassette tapes. Law enforcement intervened to stop peer-to-peer file-sharing services like Napster. Apple created iTunes that allowed the users to download individual songs for a fee. iTunes became massively popular since the alternative is to buy the entire album cassette. Music lovers further benefited with the arrival of YouTube and subscription-based streaming services. For $10 a month, Spotify offers over 35 million songs on demand.

All is well for the audience, but what about the creators?

Today, the more prominent, famous artists are doing well with sponsorships, endorsements, advertisement deals. However, it’s challenging to make money as an upcoming artist on the internet. Spotify pays $0.00437 per stream to the owner of the music rights. That will take over 300,000 streams to earn a minimum living wage. Spotify is paying out 75% of the revenue, it is the best they can do with their business model. YouTube that runs advertisements on the videos, designed its platform to favour popular, influential channels. If you are a YouTuber with a dedicated following of (less than) 10,000 people, who always look for what you make, it’s impossible to make money.

Projected YouTube earnings for 10,000 monthly views.
 Credits: Influencer Marketing Hub

Further, in centralized platforms like YouTube, creators should adhere to the algorithms to make themselves visible among the crowd. Writing clickbait titles, coming up with a flashy thumbnail, creating content on viral topics are steps to run a successful YouTube channel. Choosing the product endorsement path, a luxury for upcoming creators, will further put them in the backseat as they now must make content that is suitable for brand placements. If you are an amateur podcast creator, without many subscribers, attempting to make a living on YouTube or other related platforms will most probably make you broke, drive insane or both.

Other categories of creative industries underwent a similar transition. Physical books were taken up by publishing houses who owned the book and paid a royalty to the authors. Like the music industry, self-publishing is also skewed by outliers. Artworks were taken up by museums and auction houses. Artists depend on these institutions to make money. For an upcoming author or painter, it’s challenging to make money in a mainstream way.

When the New York Times (NYT) observed most of the advertising revenue going to Google and Facebook, they decided to change their digital revenue model. In 2011, NYT launched its first paywall on its website and started subscription plans. It was the time when paid revenue models on the internet were written off against the advertising models. Experts argued that advertising is the only way to make money because people are not used to paying for content they access online (for free).

But NYT’s subscription model became a massive success while advertising revenue continued to fall over the years. NYT bundled its subscriptions depending on the needs of the reader. Their crosswords alone have reached 400000 subscribers. NYT also engaged with subscribers allowing them to ask questions to the panel of experts on different topics. It enabled the news publication to forge a relationship with their readers. As of February 2020, NYT has 5.2 million paid subscribers, of which 3.5 million are digital-only. This story became the bedrock for the tip jar business model.

NYT’s success is attributed to fundamentally two things. First, users will pay for something that makes their lives better in some way. We can see this materialize in the success of e-learning platforms. Secondly, continuous engagement with the subscribers is necessary to convert them into a loyal following. Modern platforms such as Patreon, Substack are using these principles to help upcoming artists, writers to make a meaningful living without worrying about the advertising revenue.

“They are going to be paid…and they are going to be valued.”, says Jack Conte, founder of Patreon.

Artists create a Patreon page to publish their work. Patrons (subscribers) offer recurring payments from as low as one dollar every month to view the content. Artists also offer multi-tier subscriptions (like NYT bundle) for patrons to choose. A first-tier subscription (say $2) will allow them to view the content, whereas higher tier subscriptions (say $20) will deliver handwritten notes, merchandise from the creator. Substack enables writers to publish newsletters for their subscribers in the hope of converting some of them into paying members. Readers can learn new things in their area of interest. It even offers a guide to the writer to build his or her audience before asking them to pay.

A Patreon membership page

These platforms establish, for the first time, an influential audience to creator connection. The audience, paying money directly to the creator, feel good for supporting their work. The crowdsourcing platforms, suitable for ambitious one-time projects, often do not meet the goal. Tip jar platforms allow the creator to build a stable audience from the ground up. The micro-payments (as low as $1) does not add a lot of burden to the audience. Creators can focus on doing the things they love without worrying about the advertisers or uncertainty of income. The platforms also create a safe space for creators free from online trolls and bullies.

The platforms enable creators of a specific niche, to build their fans. A comic about humans living with androids or a feminist anime might not appeal to a mainstream audience, but with the help of platforms like Patreon, they will be able to make decent money. Patreon takes anywhere between 8% and 12% of the money creators make while Substack takes a standard 10% cut. Five thousand patrons with $1 a month pledge or five hundred readers with $10 commitment, it can easily cover the cost of living in any major city in the world.

Creators who are successful in Patreon say it takes an incredible amount of time from their life. Since most of that time is spent on doing more of what they love to do, it’s an excellent deal for committed, passionate artists. Running tip jar model business is not easy, and it is most certainly not ideal for a non-serious, side business. But, before going for their big break, artists can keep doing what they love or even convert it into a full-time job. It’s only possible due to the tip jar business model powered with technology.

Every business model has its risks. Firstly, the tip jar business model will face the threat of plagiarism. Anyone who subscribes can repost the creator’s content on the internet. The platforms should be prepared to address the issue. Even though tip jar platforms are less centralised as compared to YouTube, they still make and enforce rules. Patreon banned far-right provocateurs from its platform. It might push them to seek other platforms (or create their own). But, the tip jar model is here to stay.

Legendary artists like Beethoven, Vincent van Gogh, Edgar Allan Poe struggled financially. Most of the successful artists depended on kings, aristocrats, media houses, record labels and advertisers for their living. Gone were the days when an aspiring artist needed to settle for a ‘real paying’ job.

If an artist’s craft makes a difference in somebody’s life, they will be paid, and they will be valued. Now is truly the best time to be alive not just as an artist but as a human.


Feel free to say hi on Twitter or LinkedIn