Substack and Incentive Alignment

By: Eli Levi  |  September 19, 2022
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By Eli Levi, Business Editor

Substack is an online publishing platform using innovative methods to optimize the creator and customer experiences, while nonetheless remaining monetizable. Typically, a substack writer releases content to a paying, subscribed audience, and need not worry about the backend work such as payments, online presence, comments, etc. In exchange for facilitating the exchange and handling the logistics, Substack takes 20% of the subscription revenue. Although this is a sacrifice that the platform’s writers willingly undertake, this unique model, wherein writers connect directly to their audiences and monetize their user base, causes Substack to stand out from more traditional forms of popular media in a few key aspects.

Substack adopts a very hands-off, policy when it comes to regulating what content writers can or cannot produce, thereby enabling user demand to dictate the content rather than a set of company ideals. This is advantageous because it facilitates freedom of speech which many believe to be the greatest weapon against misinformation. To use an extreme (but demonstrative) example, censoring Nazi rhetoric in a Facebook-esque fashion is not something that Substack ascribes. Instead, it allows for the competition of ideas, believing that in the long run, the truth will prevail. In assuming this approach to media, Substack is very careful to make sure the way they are monetizing and moderating its platform is aligned with its values and culture of unobstructed contact between creator and consumer.

One of the fundamental principles of any startup is taking market feedback and using that, and only that, to improve the product. This is something that Substack’s business approach embodies, by only adding features to their service in accordance with demand. In addition to embodying this idea by minimally regulating the type of content published, the Substack platform is designed in a way that it is simple for writers to join and leave the platform, should they choose to. This forces Substack to constantly be improving the experience for writers, to ensure they continue to stay and use their platform.

Substack’s commission-based monetization is a form of incentive alignment, meaning that Substack is structured in such a way that the company profits more when the writers on Substack make more money from subscriptions. To give a counterexample, Facebook monetizes content by vying to hold the user’s attention for the longest period of time, even if the content being viewed is not productive or not in the user’s best interests. By taking 20% of what writers earn, Substack’s model supports their writers in producing meaningful content that is of interest to those viewing it.

Substack also differentiates itself by not having an algorithm (as detailed in The Social Dilemma) that recommends which writers to subscribe to. Instead, Substack shows readers who the writers that they already read follow. Thus, Substack is designed in a way that everyone’s incentives are aligned: Substack, the writers, and the users. The Substack model also lends itself to less polarization because it is not characterized by people angrily tweeting back and forth at each other. On Substack, someone has to take the time to flesh out their ideas and then thoughtfully respond. Slowing down the process and conducting a long-form dialogue are conducive to a more insightful, less brash, and overall enhanced experience that yields little polarization in comparison to today’s standards. Chris Best, the CEO of Substack, also makes the point that someone that hates you might follow you on Twitter, but no one that hates you is going to pay to read your material on Substack. Substack creates a tailored service where users can pick exactly what they want to read and what content they want to pay for.

Substack has tapped the force of incentive alignment to drive its business forward. Incentives are one of the most powerful economic forces out there. Here is how Josh Brown sums up how powerful incentives are.

“Show me the incentives and I will show you the outcome.”

That’s a Charlie Munger quote about how incentives drive nearly everything. I have come to accept this philosophy as one of the simplest, strongest heuristics through which to view nearly everything pertaining to human affairs. Nothing I’ve seen in my industry has ever contradicted it.

By aligning its incentives with its user’s incentives, Substack taps into this powerful force and drives the company to always make the experience better for their writers. By starting with its premise and goals and then setting the company’s structure up in a way that aligns with its goals Substack has positioned itself for success.

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