Substack's Core Growth Loop

The key to any fast growing company is having one or more compounding growth loops. In a previous quick take, I wrote about why good creators should never post on medium. As part of that I mentioned why I think Substack (or something like it) will take over Medium. That triggered a bunch of questions on why.

Substack's Primary Growth Loop

Substack's primary growth loop is what we call a User Generated, User Distributed content loop within Advanced Growth Strategy program.

1. New Creator Joins

2. Creator Creates Content

3. Creator Distributes That Content

4. Other Creator's See Creator Is Using Substack

5. New Creator Joins

Substack has other loops, but this is their central one.

Why Does This Loop Work For Substack?

There are plenty of other options and places for good creators to create. So why is this loop working for Substack? The nuances of what makes a loop work in one situation, but not another come down to what lives beneath the steps of the loop. This loop works for three primary reasons:

1. Good Creators Consume Other Good Creators

   The title says it all. If I'm a quality creator, I consume the work of other quality creators. That makes the connection between the distribution and new creator steps work.

2. Substack's Presence Is Just Enough

   A key is that the emphasis of the experience is on the creator's brand, not Substack's. But that doesn't mean Substack's presence is hidden. This is key. Substack's brand is just present enough that other creators recognize what the original creator is using, but it isn't so present that it turns creators away. They do this through things like the url (creator.substack.com) and "powered by" branding in emails and on the site.

3. Substack Addresses The Why Of The Main Constraint

   The key constraint in this loop is getting new good creators to choose their platform. If that happens, the rest of the loop takes care of itself. Substack addresses the key motivations of the creators:

   • Ability to own their audience.

   • Easy ability to monetize their audience.

   • Reduced friction of creation and distribution all in one.

   • Emphasis of experience is on the creators brand, not Substack's brand.

If you'd like evidence of this, look no further than this twitter thread from Matt Sherman who just switched from Medium to Substack:

"In the 3 months since I've been very active on Substack, I have made more money than I have on Medium in the entire 5 years I was writing on it. I have a quickly growing emails list whereas before, none of the metrics were mine."

Substack's Monetization Model - Accelerator or Hinderance?

Substack takes 10% of a creator's subscription revenue. It's not yet clear to me if this will be a long-term enabler or hindrance to its growth model. One thing that we emphasize in the Monetization program is that your model enables or disables your growth loops.

For Substack, the percentage of revenue as the model enables a few things:

1. Low CAC Loop - The model enables the loop above. It reduces friction in converting to a new creator (nothing to pay upfront). But also enables free newsletters which drive the loop even more.

2. Aligns w/ Outcome - The best pricing models align as closely as possible with the outcome of the user. This is important for a variety of reasons, one of which they are able to spend more supporting a creator as that creator grows.

But once you get to a certain scale, that 10% becomes a pretty big barrier for creators because Substack fees become more expensive than running something like Ghost or piecing together your own solution using a CMS + ESP + Paywall. I've talked to a few creators making tens of thousands of dollars per year who are already questioning the 10%. This could create a 'graduation' problem for Substack where their most successful creators eventually leave.

Sequencing Loops, Discovery, and Bundling

One thing that Substack probably has to think about is combining this initial success with some additional form of a growth loop that provides defensibility and justifies the 10% as you scale. This typically comes from some type of network effect. To be a platform rather than just a tool, Substack needs to answer the following question: as another new creator joins the Substack, how does it become better for all the other creators as well?

One value prop they could enable is discovery. Creators would then choose Substack not only for the reasons above but also because they also drive more subscribers and revenue than building your own platform. They already do this a little with their leaderboard.

A different way to enable this would be through enabling features like bundling. If I'm on Substack, I can easily bundle my newsletter with other Substack creators to drive more subscribers and revenue for all of us. But if I don't create on Substack, then that becomes harder. I've already seen some creators doing this manually, but my guess is that a bundling feature on Substack would remove friction and enable far more creator bundles.

There is a lot more they can do. But alas, I'll keep this to a quick take, and not an essay :)