Gumroad Wallet, A $100M Opportunity
A Case Study on E-commerce Providing a Better Payment Experience
Welcome to The Payments Engineer Playbook, the newsletter for startup founders who find themselves dragged into payments technology. I’m Alvaro Duran.
Today’s post was inspired by a tweet by Sahil Lavingia announcing that Gumroad was hiring a product designer. “Go watch the last public board meetings”, it said, “and let us know about an idea you have to implement”.
I’m not looking for a job, but I certainly have ideas!
Consider sharing this post with a founder whose startup faces tremendous pricing pressure from its competitors.
I had a single goal when I published The Databases of Money: to use the money to buy the Notioly illustration pack.
Once the first purchases came in and the launch excitement wore off, I realized that the whole process (selling a digital product to buy another one) involved paying quite some fees:
First, the e-commerce platform, Gumroad, takes a slide of the revenue.
Then, Stripe takes another slide to send that money into my bank account.
After that, I pay for the illustration pack, and its seller incur the same fees.
Finally, the seller receives the money.
I get it. Everyone is providing a service, and I’m OK with the fees as long as these services are needed.
But…why is Gumroad forcing me to pay Stripe twice? Can the Notionly seller and I circumvent the payment provider by being both on Gumroad?
I believe we can. I also believe that Gumroad is sitting on a $100 million opportunity because of that.
The Billion Dollar Test
Warren Buffet used to say that good industries are those where a new entrant with a billion dollars to burn wouldn’t be able to make a meaningful impact. He called it “The Billion Dollar Test”.
Selling digital products online should be one of those industries. Unlike material goods, digital products can be sold at scale. Every extra purchase happening on an e-commerce platform is effectively free, which means that Gumroad, or any of its competitors, can spread its fixed costs over unlimited users selling unlimited products.
On top of that, we’ve seen a Cambrian explosion of successful tech companies with network effects, where a significant value is provided, not by the technology itself, but by its widespread adoption.
There are now a few individuals making fortunes publishing online, but not even MrBeast can leave Youtube.
Gumroad’s Troubled History with Asking for Money
Gumroad has figured out a way to cater to indie creators who reject Amazon’s one-size-fits-all approach and Shopify’s unnecessary complexity to launch individual products.
I probably became aware of Gumroad because I read his founder’s essay on failing to build a billion dollar company. The company’s brand is strongly attached to him, and both have leveraged it for the win.
Lately though, Gumroad’s pricing has been in the spotlight.
Up until 2022, Gumroad had converged to tiering its pricing. As creators sold more products on the platform, Gumroad used to slowly reduce fees until it was effectively passing down its payment provider’s costs and nothing else. Tiering aligned with Gumroad’s customers business life cycle, setting up a gamified environment where creators were motivated to continue using the platform in exchange for a better pricing.
That worked. For a while.
See, for the last 15 years, money had no expectations. In keeping interest rates at zero, the Federal Reserve and other central banks globally had pushed investors into riskier and riskier propositions.
Gumroad, and other startups, were incentivized to push profits into the future and focus on growing their user bases. The platform could afford having its best creators pay in the form of praise, and could wait for future creators to pay the bills, eventually.
This situation, as you may know, no longer applies. Central banks are fed up with rising inflation, and have been aggressively increasing interest rates to contain it.
Expectations are back. Gumroad can’t afford any longer having some creators pay nothing, especially if they are earning so much revenue. Playing games with fees is now officially over.
In late 2022, Gumroad announced that it was abandoning its tiering structure in favor of a 10% flat fee.
Gumroad is now making money, but the fact that there’s been significant churn after the pricing change shows that the company sits, not on top of network effects, but on a strong brand and a charismatic founder. For most creators, Gumroad is a cashier system, and no amount of features will make it look better than competitors if fees are too high.
Short term, Gumroad will be fine. Long term is another story.
What The Hell is Water
There’s an underlying assumption in every e-commerce platform, Gumroad included, that is very intriguing to me.
You see, all of them take the credit card fee as a given. Payment processing fees are like a force of nature, something not to be reckoned with, just like water in that famous speech by David Foster Wallace.
Don’t believe me? Here is what Gumroad’s CEO had to say about the shift from tiering to flat fee:
“We had this tier structure where basically once you made 100K on Gumroad we would go to 3% plus 30 cents, which meant that almost all of that [gross margin] would go to Stripe”
It’s not just Gumroad. Payhip explicitly mentions Stripe transaction fees on its pricing page, and so does SendOwl and Podia.
Every e-commerce platform charges fees
on top of their payment processor’s.
What if Gumroad could charge below that, and still be profitable?
What if, in doing so, the platform would become less of a brand-based startup, and more like one with network-effects, like Youtube?
What if being part of Gumroad benefited creators beyond being paid for what they sell?
What if they could leverage those gains to buy from other creators in the platform for lower fees?
Wallet as a Way Forward
There are 3 sections for any new paradigm in technology:
Doing current use cases better
Coming up with a new business model
Creating entirely new use cases
By implementing digital wallets, Gumroad would allow creators to trade, not just to buy and sell. They would be able to circumvent payment platforms and match buyers and sellers directly. Just like a clearing house, fees would be lower because funds would never have to leave the platform.
Digital wallets like Venmo, Zelle and CashApp enable users to make and receive payments and store cash balances. What Gumroad would do is to implement what is known as a closed-loop system, where the user must first link an external payment system, just like it’s doing now, but with the ability to move funds around in exchange for goods purchased inside the platform.
I bet there is a significant number of Gumroad creators who, like me, buy products from other creators inside the platform. That number has never been mentioned in any of Gumroad’s public board meetings (believe me, I’ve checked). Likely, that’s because it’s not actionable for them.
Not yet.
As selling products online becomes the norm, startups are in the business of selling, not actual products, but digital tokens, immaterial claims to the real thing. What an e-commerce platform can offer is therefore not simply charging less, but a superior payment experience.
I discussed that view already in The Payment Experience Manifesto:
Software is already here. You don’t hear about companies that aren’t online because they aren’t anywhere anymore. But technology has become a commodity. It is the payment experience where customers are still divinely discontent.
For a while, experts claimed that there was no other business model that could be valid online if it wasn’t for-free and ad-driven. But perhaps what happened is that people were OK with paying for things, and incumbents weren’t providing them with reliable ways to do it.
The economy is digitizing steadily, and Gumroad will have to compete against more and more companies. The logistics of moving money online is overshadowing the logistics of moving physical products.
First mover advantage
Why hasn’t anyone shifted yet? In short, they don’t think it’s worth their time. Payment applications appear easy on the surface, but by now most founders have learned that they are deceptively complicated. Payment gateways like Stripe have partnered with so many startups in the space, it is as if they were all trying to keep payment processing fees the same.
The whole system is forcing Gumroad creators to pay Stripe twice as many times as we need to if we want to buy from each other. If Gumroad team pulls it off, they will manage, at the same time:
To create network effects on the platform that don’t exist yet, by virtue of each individual creator being able to sell at a lower price as long as they are selling to other Gumroad creators.
To boost Gumroad Discover, their recommendation engine, as a result of creators being incentivized to seek what they need on the platform before looking elsewhere.
To earn revenue on funds sitting idle inside creators’ wallets, in much the same way that Starbucks earns a massive amount from its gift cards.
It’ll take the first one to figure out how to do this right, and it will take off. It could very well be Gumroad Wallet. But it could also be one of its competitors.
I can’t wait to buy my Notionly illustration package. But I don’t like paying fees.
Especially if they are unnecessary.
Blockchain technology is taking over this time around.