How the YouTube Creator Economy Works

How the YouTube Creator Economy Works

For three June days, the epicenter of the creator economy coalesced here, in the heart
of sprawling Southern California.
Gone for three years, the return of VidCon to the Anaheim Convention Center was a big
deal.
Since its inaugural year—piloted by John and Hank Green on a tight budget, and attended
by a thousand and change in a Hyatt basement in 2010—each VidCon, effectively mirroring
the growing industry itself, has one-upped the last.
More attendees, bigger creators, and glitzier booths each year became the norm from 2010
to 2019.
Considering such an upward trajectory, along with the growth of the creator industry in
its absence, this VidCon was much anticipated—and broadly, it didn’t disappoint.
It was, however, different.
Like VidCons before, companies competed for attention with photo booths, free snacks,
and interactive attractions; fans showed up in droves; and creators pulled healthy audiences
to scheduled talks.
But it felt different—and major media outlets took note.
Many identified the change in presenting sponsor from YouTube to TikTok as a potential changing
of the guard, while others noted a relative dearth of big-name YouTubers in attendance.
What everyone covering the event missed was perhaps the biggest change of all.
Away from the conference floor itself and tucked away upstairs and offsite, platforms,
companies, and agencies quietly competed for creators’ attention in exclusive, backstage
lounges and parties set up by the likes of Meta, JellySmack, YouTube, Karat, and Snapchat.
In the three year absence, the creator economy had grown into a matured, diversified, $100
billion business.
But behind all the pomp and circumstance of the big events; the stiff competition between
the different platforms; and the wining-and-dining by agencies, companies, and brands is, of
course, the creator, their content, and their income.
As an example, let’s say there’s a YouTube creator with two million subscribers who averages
one million views per video.
How do they make money, and how much?
The well-known core of any YouTuber’s income is Adsense—the system that serves the ads
before, during, or after videos.
This hypothetical channel could expect to earn about $4,000 in Adsense revenue for their
million views, based on a typical revenue per mille rate, or RPM, of $4—meaning they
earn $4 per thousand views.
However, there is wild inconsistency on Adsense RPM’s from creator to creator.
The Adsense system’s selling point for advertisers is its ability to target ads to be served
to audiences with particular geographies, demographics, or interests.
So, creator income all has to do with how valuable their audience is to advertisers.
Advertisers only pay 1/5th the average to reach customers in Brazil—likely as Brazilian
spending power is lower—so if our hypothetical channel was produced in Portuguese, and therefore
had a big chunk of its audience in Brazil, it likely would earn a lower-than-average
RPM.
On those million views, the creator might only earn $1,200.
Meanwhile, advertisers value audiences with particular interests quite highly.
Creators making videos about business or finance tend to have quite high RPMs, because there
are loads of investment platforms, banks, crypto companies, and others competing to
get those valuable advertising spots seen by an older, wealthier, financially-savvy
audience.
If our creator made a US-based, english-language personal-finance channel, they might earn
$8,000 in Adsense on those million views.
But for the sake of realism, let’s assume the average—let’s assume a $4 RPM, translating
to $4,000 in Adsense income.
But there’s plenty of opportunity to dramatically grow the value of those million views.
Perhaps the most common is sponsorship.
Early into the development of the creator economy, advertising agencies noticed something:
the most effective means of selling something off of the attention a creator’s work attracts
is through the creator.
Between a 45-second externally-produced Adsense ad before the video versus a 45-second sponsorship
voiced by the creator at the end, the latter overwhelmingly leads to more sign ups.
With this recognition, the influencer marketing business was born.
Influencer marketing is a little more complex than Adsense.
Typically, YouTube sponsorship is used by brands looking for sign-ups—it’s conversion
marketing, not awareness marketing.
You wouldn’t expect Coke, for example, to sponsor a YouTube video because their marketing
focuses on assuring people think about Coke so they buy it when the opportunity arises,
rather than getting people to buy a Coke at that exact moment.
More often than not, the companies that do find YouTube influencer marketing worthwhile
are either online subscription services—Audible, CuriosityStream, Squarespace, BetterHelp—or
direct to consumer subscription brands—HelloFresh, Dollar Shave Club, Shaker & Spoon.
With the subscription model boosting the lifetime value of an individual customer, Dollar Shave
Club can afford to spend more to get a given customer than Gillette, for example.
Why this works for them is because of that link in the description.
Most sponsorships include a certain percent discount when users sign up through the creator’s
dedicated link.
Not only does this drive increased performance, but it also assures that the hugely-valuable
data tracking an individual spot’s effectiveness stays accurate as it incentivizes users to
follow the dedicated link, rather than the primary sign-up flow.
Almost every brand.com/creator link operates as a tracking URL, capturing data about how
many people click through, how many people sign up, and even how long those sign-ups
stick around as customers.
These individualized data allow for a level of optimization far above what’s possible
with TV, radio, or billboards, and provide a simple mechanism to monitor whether the
campaign is actually providing a return on investment.
But what these data have also illuminated is the huge degree of spread in the worth
of a view from creator to creator.
What influences this more than anything is the strength of the parasocial relationship.
Parasocial relationships are a well-documented psychological phenomena where individuals
start to feel as if they have a genuine relationship with a personality that they have repeated
exposure to through media, even when they have never met or interacted with said personality.
People trust their friends, and so they also trust those that they have a parasocial relationship
with.
Therefore, the stronger the parasocial relationship, the more effective a given call to action
is.
YouTube creators can and do make certain content decisions to improve the parasocial relationship.
Being on-camera boosts it.
So does injecting more personality into videos.
Speaking in a less-scripted manner does too.
Even keeping visual quality relatively simple has proved successful in boosting the parasocial
relationship, as it can help make videos feel like they’re made by a person, rather than
a company.
For creators, the process of figuring out what a given sponsorship is worth is complicated.
It all starts, of course, with the sponsor, but most companies’ marketing divisions
are set up to write big checks to outside ad agencies that design and execute a given
campaign.
Even with individual YouTube sponsorships running well in the tens or even hundreds
of thousands of dollars, these companies are used to working in the millions so they generally
contract a specialized influencer marketing agency like Semaphore, the Outloud Group,
or Veritone One to divide up the check and run the campaign.
If a personal finance app is running a $2 million campaign with a $35 target cost per
acquisition, the agency’s job is to properly price, book, and manage the individual spots
to drive 57,143 or more conversions into paying customers.
The performance variability for sponsorships is even greater than even that of Adsense,
but with this sort of target CPA and this sort of product, creators often range between
500 and 5,000 views per conversion.
An agency might see that our hypothetical channel averages a million views and would
therefore likely drive about 400 conversions, so based on the $35 CPA, the creator probably
deserves about $14,000 for a sponsorship.
However, in practice, the creator only sees some of that.
Agencies can typically charge whatever commission they want—while taking 10 or 20 percent
is common, they could take 30 or 40 percent too as long as they can find creators willing
to accept that offer.
In fact, they don’t even need to disclose what commission they take—they could just
offer the number post-commission.
In practice, well-established, major agencies have been found taking 50% commissions without
disclosure, meaning on that $14,000 spot, they’d keep $7,000.
There’s also not a strong market mechanism to assure that prices stay correlated to performance.
Most agencies and sponsors keep the data to themselves, so if a creator’s sponsorship
performance improves—as it often does through time as the parasocial relationship deepens—prices
only adjust if the agency agrees to it, and only the agency typically knows if the performance
has truly improved enough to justify it.
Agencies will boost rates if they’re worried the creator will turn down the offer, but
the power dynamic is undoubtedly weighted towards the agency’s side, and contractually,
they typically work for the brand, not the creator.
While larger creators have managers or agents who know how much their client’s sponsorship
slots are truly worth, younger or newer creators often have zero idea and have not yet established
a network of colleagues with whom they can gut-check rates.
They’re therefore in a prime position to be taken advantage of at the exact moment
when they feel like their dreams are being fulfilled—$7,000 sounds amazing until you
find out it started as $14,000.
Of course, YouTube isn’t the only platform where creators are now making a living.
Twitch, Meta, TikTok, and Snap have each recognized that their platforms only go as far as the
creators they attract, and this realization has effectively started a race for talent.
And again, this year’s VidCon offers hints as to how this race is playing out.
The fact that a panel dedicated to demystifying the algorithm with Jimmy Donaldson, aka MrBeast,
and Todd Beaupre, YouTube’s director of product management, reached maximum venue
capacity speaks to the platform’s continued pull.
As one attendee explained, while they had developed a TikTok profile with more than
half a million followers, they were at the panel because they wanted the stable income
that YouTube could provide.
TikTok might be taking off, but at this point, YouTube still holds an important advantage,
and it’s one that’s grounded in the platform’s past.
By 2011—the year Snapchat was founded and Twitch was launched as the gaming offshoot
of Justin.tv—YouTube had surpassed three billion views a day and had begun experimenting
with monetizing channels beyond exclusive partners.
A year later, it opened the YouTube Partner Program to everyone, allowing all creators
an opportunity to make money off their products—a remarkably prescient recognition that the
platform only went as far as the creators populating it.
Then, in 2013, an ascendent platform threatened to undercut YouTube the way Twitter had undercut
blogs—by promoting short form.
Vine’s simple interface and its adherence to a strict six-second cap on videos took
off—making it the fastest growing app in 2013, and home to 200 million monthly users
in 2015.
The only problem was that neither the platform nor its popular creators could make money.
Vine fostered talent and developed fame, but nobody could figure out how to build anysort
of monetizable rapport with an audience in only six seconds.
Instead, advertisers and creators pivoted to more expansive platforms like YouTube and
Instagram.
Within this early wave of potential YouTube competitors, it was only Twitch that figured
out how to successfully monetize the platform in a manner that attracted and retained talent.
With video game-streaming personalities as Twitch’s main draw, keeping talent on the
platform was of life-or-death importance to the site.
Along with the option to run ads on their streams, Twitch kept its creators by developing
a host of revenue-generating routes that included memberships, donations, affiliate links, and
direct paid subscriptions to their favorite channels.
This approach has turned the platform into one of the industry’s most powerful, as
roughly 300,000 of the two million self-identified professional creators exist primarily on Twitch.
While YouTube and Twitch proved the commercial viability of long form video and streaming,
recognizing the unmet potential of short form has proved both alluring and elusive.
The very same year that Vine officially shutdown, TikTok appeared in American app stores.
The rise of the Vine-like, easy-to-use, hyper-creative, hyper-consumable platform hasn’t been anything
short of meteoric.
In Q1 of 2021, TikTok was downloaded 315 million times world-wide—the most of any app in
a quarter ever.
And yet, for the vast majority of TikTok creators without powerful brand partnerships, making
consistent money through their success on the app is difficult.
Paid music promotions from record labels, sponsored posts, and cash gifts direct from
audiences during live streams offer little stability and limited growth potential.
To alleviate some of the monetization pains, TikTok introduced a $200 million creator fund
in 2020.
But because TikTok uses in-feed ads untethered to individual content, it’s difficult to
attribute the success of an advertisement to a given creator, and thus, difficult to
dole out payment in relation to performance.
Additionally, with the fund having a hard cap, the more successful creators inhabit
the ecosystem, the fewer dollars there are to spread around.
As Hank Green pointed out, because of this static pool and the app’s continued growth,
his TikToks, as of January of 2022, made about 2.5 cents per thousand views, a worryingly
low number by itself, but one made increasingly troubling by the fact that he used to make
5 cents per thousand views.
TikTokers are making money, but it’s a dollar hard-earned, leaving the door ajar in the
race for their users’ creative output.
In 2020, Meta launched Reels, Snap launched Spotlight, and YouTube launched YouTube Shorts.
All were new features that closely resembled TikTok.
In the year following its launch, Spotlight paid out over $250 million from its creator
fund.
In 2021, Meta announced plans to invest $1 billion in its Facebook and Instagram creators,
including a bonus program for Reels based on performance.
As of 2022, though, the future of short form video is still very much up in the air.
What is certain is that creators today have more options than ever before, and thus, more
leverage than ever before.
With various platforms that cover various mediums at their disposal, financially successful
creators have gone from being thought of as multimedia aberrations in the 2010s, to ever-critical
cogs in a growing industry where entertainment and advertisement so seamlessly overlap.
Creators of all sizes are spreading from one platform to multiple, and some are beginning
to move beyond platforms entirely.
Combining $4,000 in Adsense with $11,200 in sponsorship, our hypothetical creator currently
makes about 1.5 cents per view, but simultaneously both the agency and Google are making about
0.3 cents on the same view, and then on top of that, the sponsors and advertisers are
making more on the profit the marketing generates.
While it’s impossible to know the exact number, it’s very possible that each of
this creator’s views is generating 3 cents in economic value, and they’re only getting
half of it.
While shared profits are a normal part of doing business, creators have recognized that
the more of those three cents they capture, the more they earn.
In practice, what this looks like is creators becoming their own sponsors.
It started with merch: channels would slap their logo on a shirt or hat or sticker and
sell it.
Some people bought these, but often just the most devoted fans—our creator that could
get $11,200 in a sponsorship would likely only earn $1,000 or $2,000 from replacing
that sponsor segment with a merch shout-out.
In response, creators adapted their merchandise more into clothing lines—Logan Paul, for
example, runs Maverick Clothing.
With clothing brands competing against other clothing brands, this operates more like a
business than merchandise, so creators often find this strategy far more effective, and
sometimes competitive in performance versus an outside sponsor.
Logan Paul claimed his brand made between $30 and $40 million in its first year, while
our channel might expect to profit around the same $11,200 from promoting its clothing
brand as with an outside sponsor.
Taking this to the next level, the predominant trend of the past few years has been creators
launching fully-fledged businesses.
MrBeast started selling burgers cooked by ghost kitchens on food delivery apps under
the MrBeast Burger brand, which has since expanded to over 1,000 locations in the US,
Canada, UK, and UAE.
Mark Rober and Vsauce started subscription box companies called Crunch Labs and the Curiosity
Box, respectively.
Johnny Harris co-founded a travel course platform called Bright Trip.
The Nelk Boys launched their Happy Dad brand of hard seltzer.
Simone Giertz created the Every Day Goal Calendar.
Even Wendover Productions co-founded the Nebula streaming service, which operates as an equity
joint venture with the creators contributing to the platform—a fact that is made clear
in its ads for good reason: it works.
Across the board, what creators have found is that not only do they get to keep more
of those 3 cents per view, but also that a given viewer is more likely to convert into
a paying customer when the sponsorship is presented as promoting their own business,
rather than the highest bidder.
That’s to say, not only are creators getting more of the pie, they’re also expanding
it.
What was three cents per view might become four, and therefore what was a $11,200 sponsorship
on a million views might become $28,000.
With $32,000 in total income on that one, hypothetical, million view video, this hypothetical
creator has effectively earned 3.2 cents per view.
This is orders of magnitudes more than they would’ve earned on the same view a decade
ago, and yet more orders of magnitude more than they would’ve earned from a view on
Facebook, TikTok, Instagram, or elsewhere.
This is how YouTube creators are now able to go full-time making channels that previously
would’ve been but a hobby.
Newer creators tend to have less optimized channels, but even assuming 1.5 cents per
view, bi-weekly releases of videos achieving 150,000 average views would provide about
$4,000 in monthly income.
Simultaneously, it’s these same figures that allow the absolute largest creators—MrBeast,
the Paul Brothers, Markiplier, and others—to generate wealth rivaling that made in the
mainstream entertainment industry.
This is YouTube’s competitive advantage.
“YouTuber” is now regularly ranked as one of kids’ top dream jobs—up there with
professional athlete, firefighter, and veterinarian.
With a massive pinnacle to the dream and a relatively achievable entry-point, creative
people will keep choosing YouTube as their platform of choice over TikTok, Instagram,
Twitter, or any other social site, because as the other platforms are attempting to get
creators to work for less, YouTube, through the years, has successfully developed a platform
than earns creators more and more and more.
Of course, you know what’s coming next.
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