There’s a thread going around written by Gergely Orosz who writes the #1 tech newsletter on Substack. In his thread, he mentioned why Substack makes a ton of sense for him because of the growth it provides his paid newsletter.

In the example, he says the Substack Network provided him 23% growth last month and since it only took 10% of his subscription fees, then it’s a no-brainer to stay on the platform.

He is right. In this example, assuming Substack’s own attribution is correct, then Gergely is making money by using the platform. More so, he would lose money by leaving the platform. 

And this outcome is no mistake by Substack. I tweeted in Feb of 2021 on how Substack has to provide growth to its userbase or it would be a total failure. 

In the last 12 months, they’ve added numerous features to help users with discovery, including an app and a recommendation engine like you see below.

Austin Rief mentioned today that if (growth-cost) > 0% then no newsletter should leave Substack. He’s right. I’d even argue that it could even be something like (X-Y) > -2% and it would still make sense to stay on the platform.

So with these new growth features has Substack figured it out?

In short, no.

First, they still face an uphill battle by being anti-ads and only focused on subscriptions. Substack needs the TAM for subscription content to grow in order to have success. There’s not been a prolonged recession since the NYT launched its digital subscription in 2011, but in 2009 their subscription of print dropped 10% from 2008.  If the economy sees a rough patch, paying $10 for your favorite newsletter every month will be one of the first things cut. 

But what if they really figure out promotion and the TAM grows? 

There are two types of promotions that Substack can provide newsletters. 

The first is to net-new Substack users. This is bringing new subscribers into the ecosystem. Mainly, this would be done on the homepage of its website and will only happen in a big way if people really buy into wanting to pay for content. 

The second is a promotion to current subscribers within the ecosystem of Substack. Substack has already done this pretty well, and they continue to get better at it. 

But not all growth is equal. 

Almost any media company that has numerous newsletters knows that there’s a certain threshold of newsletters that one subscriber can subscribe to before the increase in churn is so much that it’s not worth the cross-promotion. 

Substack is not providing cohort data on these subscribers and their channel, but if they did my instincts would say that the cross-promotions allow for quick growth to make numbers look good, but, overall, leads to higher churn across all newsletters. 

Let’s play out this scenario. If you run a paid newsletter that grows a lot organically and you start having your subscribers promoted to sign up for other newsletters through the recommendation engine, then ultimately your subscribers will churn from your newsletter faster. The only way this is worth it is if you’re promoted by other newsletters more than the 10% fee and the increase in churn. 

The entire ecosystem as of today is set up on chasing growth, not retention. Which is not where you want to be if you’re a paid subscription business. 

The group that will be most impacted by this will be the Substack paid newsletters falling in the top 80-99%. They are big enough where they’re growing on their own, Substack won’t feature them as the top newsletters like the top 1%, the recommendation engine will increase the churn of their subscribers, and they’re still paying fees that are 10X of competitors like MailChimp. Why would this group not graduate off of Substack?

Is this why Substack failed to raise a financing round last month? Maybe. That and their revenues remain pretty dismal (about $20-30M in annual revenue).

To be clear, I don’t hate Substack.  

To Substack’s credit, they continue to push the industry forward. They’ve lowered the barrier for amazing minds to write on a consistent basis. They’ve given advances to writers who were too afraid to jump into it full time. They deserve a ton of credit for the impact they’ve made. 

It’s just a shame that Substack looks like another media company that has made a huge impact on culture with little economic value to show for it because they chose the wrong business model.