What caused Gumroad's cost of goods sold to decrease from 200% to 65%, resulting in a 35% gross margin?

Guest: Without having their numbers in front of me, I'd be curious what their spending on in 2012, 2013, because they were fundamentally a different company back then. They were burning a lot of venture dollars and they were probably overspending on marketing.

I think Sahil has talked about this in previous blog posts. There was a lot of pressure on the company to spend. I think their COGS may have been artificially inflated more than it needed to be.

In terms of costs as the company grows, I think it's very common for companies like this to see far greater efficiency at scale. The biggest reason for that is, unlike most businesses where your customer acquisition is being driven by spent and performance marketing, fundamentally the biggest driver of acquisition for all of these creator economy companies, it's going to be existing users. So that's not an expenditure that increases the biggest. 

The biggest COGS are going to be hosting for these companies. It'll be service delivery. It's going to be video hosting, which is extremely expensive relative to a lot of other expenses. There is also email hosting, which is a fraction of video hosting. Then it'll be web hosting like files and things like that. 

So for Gumroad it would be video hosting and file hosting.

You can get some efficiency in video hosting as you grow, but not a lot. Certainly you can renegotiate your offers, renegotiate your contracts with Wistia.

Teachable and Podia use Wistia. I believe Kajabi also uses Wistia for their video hosting. There are other companies such as CloudFlare, even some startups that are trying to solve this video hosting expense problem, but ultimately that's, that's a huge part of COGS.

The other big part of cost for a lot of these companies, and this is actually one place where I believe Gumroad has a big advantage. I don't know if Gumroad has a paid affiliate program, if they don't, then that's a big cost advantage for them because the typical market rate for affiliate commissions in this industry is generally 30% of lifetime customer value. If you refer a customer, and they pay X dollars a month, then the marketer will receive 30% of X dollars. The platforms are going to give the person who referred the new customer 30% of that X dollars for the lifetime of that customer. As you can imagine, that massively increases COGS. 

Most companies are happy to have a program like this because you were feeding into that eventual word of mouth growth. The more people you can get on the platform, the more efficient all of the spend gets.

It’s probably a customer acquisition cost that would be unacceptable in most industries, certainly in B2B, certainly in sales driven industries. However, in this industry, the whole point is to create more word of mouth. So the business becomes more and more capital efficient. It's a cost that almost everybody right now is happy to bear. 

I think that's a place where Gumroad has an advantage because they're not a subscription service. I think if they do have an affiliate program, I think it's far less expensive for them to run.