How Does TikTok Make Money? Business Model of TikTok


How Does Tiktok Make Money

TikTok is one of the most popular social media networks. Known for its short-form videos, the platform has a few creative sources of revenue.

TikTok primarily makes money via advertising. However, TikTok also makes money from other sources like in-app purchases, creator commissions, branded hashtag challenges, and branded effects.

Founded in 2016 by a Chinese company named ByteDance, TikTok is known for its shareable short-form videos that feature challenges, dances, pranks, jokes, and even educational content. Originally released in China in 2016 under the name Douyin, it wasn’t until 2017 that the company launched a version of Douyin outside Mainland China under the name TikTok.

While Douyin and TikTok are similarly designed, the apps don’t share content. Bytedance was founded in 2012 by Zhang Yiming and Liang Rubo. The parent company also runs a news and information platform in China called Toutiao, an enterprise collaboration platform named Lark, and a number of other apps and platforms.[1]

What is TikTok & How Does It Work?

TikTok is a popular social network where users watch, engage with, and share short-from videos. The videos can range from 15 seconds to three minutes and can include everything from dances, lip-syncing, popular challenges, heartfelt stories, and skits.

Users can add songs or sounds to their videos. They can also use visual filters to create funny effects or green screens to show themselves in front of other content. The platform is focused on fostering engagement and allows users leave comments on videos or send messages to other users.

When users sign up for the app, they create a profile and follow other users. They can browse the videos of people they follow or browse via TikTok’s ‘For You’ section, which curates videos according to your viewing history. Users can also look at the app’s ‘Discover’ section, where they can search for videos like those that have been tagged with a trending hashtag.

Users engage with videos by liking them, commenting on them, sharing them to other platforms, following the creator, or filming their own React video where they are recording next to the original video as it plays.

When filming a video, there are a number of ways to customize it. You can record the video in slow motion or at a fast speed. You can use a beauty filter to hide your imperfections, you can change the color filter, set a countdown to start recording at a specific time, and add sounds. You can also create a duet where you record a video alongside another video.

TikTok is particularly well known for its challenges. Challenges involve trending hashtags where users are challenged to film videos on a certain subject or doing a particular challenge. For example, a challenge might involve a popular dance or eating something strange.

TikTok challenges have sometimes gotten bad press as some can be dangerous. For example, the cinnamon challenge where people had to try to swallow a spoonful of cinnamon caused some people to have to go to the hospital due to poisoning concerns.[2] The milk crate challenge also resulted in injuries as people tried to scale milk crate towers and fell and hurt themselves.

Unlike other social media networks, TikTok is primarily focused on lighthearted and silly content. The TikTok algorithm learns each user’s preferences and delivers that user similar videos the next time they log on. This makes the platform addictive and encourages users to spend more time on it.

TikTok builds on the popularity of now-defund platforms like Vine, which was focused on a similar short-video model. Like Vine, TikTok has been central at creating online influencers and micro-celebrities with many people using the service going from zero to millions of followers in a short time.

People who gain enough followers on TikTok can monetize their TikTok account by doing branded videos, getting tips, or linking to affiliate deals. TikTok also pays some of its creators a portion of advertising dollars out of its Creator Fund.

The TikTok Creators Fund started as a $200 million fund, but TikTok has plans to grow it to $1 billion. Users have to have 10,000 followers to be eligible for it. TikTok then pays creators between two and four cents per 1,000 views. That works out to $20 to $40 for every 1 million views.[3]

The fund is only available to creators in the US, the UK, Germany, France, Spain, and Italy at the moment. However, TikTok has plans to launch the fund in other countries in the future.

The platform has become a central influence on how music becomes popular.[4] Many artists try to get their new releases to become dance trends on the app, and record labels pay influencers to promote music. When this works, songs are shared by thousands or even millions of people recording themselves doing a dance.

TikTok is used primarily by Gen Z. In 2020, over 60% of TikTok users were from this demographic.[5] They love TikTok so much it was recently reported they would rather use TikTok to look something up than Google.[6]

TikTok’s influence is currently being felt across other social networks. For example, Instagram has famously introduced and prioritized Reels on their platform in order to better compete with TikTok.[7]

However, not everyone is happy with TikTok. The platform has faced some severe criticism over the last several years. For example, a number of articles were written about how TikTok videos about the Johnny Depp and Amber Heard trial trivialized the domestic violence case.[8]

 

Business Model of TikTok

Like most social networks, TikTok’s business model revolves primarily around engaging a large audience of active users and then monetizing that audience via advertising and other creative monetization strategies.

TikTok has been successful at giving its users an addictive online experience and steadily growing its user base. As of July 2022, TikTok had over 1 billion monetizable monthly active users on the site. While the app is available in over 150 countries, over 138 million active users are based in the US.[9] Countries like India and China also having large user bases.[10]

Only Facebook and Instagram beat TikTok in active users. However, TikTok has a younger demographic than those apps, which can sometimes translate into higher ad revenue. In the US, 32.5% of TikTok’s users are 10 to 19 years old and 29.5% of the app’s users are 20 to 29 years old.[11]

TikTok also has a high daily minutes per user average. TikTok users spend an average of 95 minutes per day on the platform.[12] They also open it an average of eight times per day.[13] All this makes TikTok an attractive platform for advertisers.

Many companies have their own TikTok accounts where they try to engage their customers and create content that goes viral themselves. Some brands also create partnerships with TikTok influencers in order to show off their products. Advertising on TikTok is therefore seen as part of a company’s overall social media strategy as their ads are integrated with TikTok content.

TikTok sells a few types of advertising and brand experiences that integrate seamlessly with TikTok’s creative content. Some of these incentivize users to create branded content themselves. TikTok offers the following kinds of branded experiences:

  1. In-Feed Video Ads: Promoted videos often look very similar to normal TikTok videos. These ads get displayed on a user’s ‘For You’ page between normal videos.
  2. Brand Takeover Ads: These ads are displayed when a user opens their TikTok app. They are seen by everyone who opens TikTok that day or your target audience.
  3. Top-View Ads: These ads are similar to Brand Takeover ads but show up after a user has started using TikTok and are seen by a smaller number of users.
  4. Branded Hashtags: Want people to do a challenge your company promotes? These ads sponsor a company’s hashtag challenge. Click on this ad takes the user to the challenge’s page where they can get instructions for how to complete the challenge. Every time a TikTok user does a branded challenge, the company is essentially getting free advertising from that creator.
  5. Branded Effects: Brands can pay for augmented reality filters or stickers that users can use. The effects can be available for up to 10 days. They allow users to more deeply engage with a brand. Users who create videos using a branded effect are also creating promotional content for that brand.

These types of engagements help brands position themselves as cool and connect them more closely with their customers. The interactivity of TikTok’s branded experiences is a key part of TikTok’s business model.

While branded challenges are critical for the app’s monetization strategy, challenges in general are a core part of TikTok’s business model. Challenges are fun, participatory activities that anyone can do. They are meant to go viral. When one does, the challenge often spills over to other social networks and is sometimes even covered by legacy media sites.

This generates a significant amount of free awareness and advertising for the network and encourages more people to join the site.

Another aspect of TikTok’s business model that is crucial is how the company creates community among users. Users often feel like they have an intimate view into the lives of the creators they follow. That makes them more likely to return to the app. But it also encourages things like sending TikTok creators tips, something that is part of TikTok’s monetization strategy.

While other social networks like Twitter have tried to popularize tips, TikTok has been far more successful at doing so.

TikTok has a number of competitors. Facebook, Instagram, and Twitter are the app’s social media competitors but TikTok also competes with other video sites like YouTube and Twitch.

TikTok is a private company, so its financials aren’t public. But market research firms estimated that in 2021 the company made $4 billion in revenue and predict it will make $12 billion in revenue in 2022.[14] While TikTok undoubtedly has considerable hosting, staffing, and development expenses, the company still has room to monetize its active audience in new ways and grow its user base internationally.

How Does TikTok Make Money?

TikTok makes money in five different ways. These include advertising, in-app purchases, creator commissions, branded hashtag challenges, and branded effects.

TikTok is a private company, so how much the company makes from each of these revenue streams is not publicly known.

 

Advertising Fees

TikTok makes a significant portion of its revenue from advertising fees. The cost of the company’s advertising varies depending on the type of ad.

In-Feed Video ads, which show up in users’ video feeds, start at $10 per 1000 views and require a minimum spend of $500.[15] Brand Takeover ads, which pop up when the user opens the app, vary but can cost up to $2 million per day since it is seen by all their active users.[16]

Top View ads, which take over channels and pop up when people open the app, cost companies $50,000 for a day with 5 million impressions guaranteed.[17]

 

In-App Purchases

TikTok sells coins via in-app purchases. The cost of the coins range from $0.99 for 65 coins up to $249.99 for 16,500 coins. However, the costs and value of coins shift from time to time. Users can send in-app gifts for their favorite creators using these coins to show appreciation for their content. Users under 18 years old, can’t buy coins which means that coins only monetize TikTok’s older audience.

Users choose the type of gift to give a creator. Each gift is worth different amounts of coins. Some examples of gifts include things like Rainbow Puke for 100 coins or a 5,000 coin Drama Queen gift.

Once a creator receives a gift, it is then converted into diamonds on their profile. Diamonds can be used to measure the popularity of creators on TikTok. Once a creator has enough Diamonds, they can withdraw them for cash.

 

Creator Commissions

Given how successful influencers can be at getting their audience to buy a product, many social networks are trying to access those revenue streams. TikTok has a shop where it connects creators and brands in order to facilitate sales. It allows creators to promote brands or products in the app and takes a commission when those products are sold. Creators receive a percentage of sales for every product sold as well.

It is unclear how much TikTok makes in commission by selling products on its platform.

 

Branded Challenges

TikTok’s branded challenges are hashtag ads that brands can use to encourage TikTok users to create videos in response to a brand’s challenge. Branded challenges help brands generate organic reach on the platform by getting creators and influencers to join in on their advertising campaign. Branded challenges can cost up to $150,000 and last six to ten days.[18]

 

Branded Effect

TikTok sells branded effects to companies. These can be custom stickers, filter, or lenses. The branded effects last for up to 30 days and allow users to create content with that effect. TikTok also promotes the new branded effect to encourage users to try it. The cost for a branded effect is $45,000.[19]

 

TikTok Funding, Valuation & Revenue

TikTok is currently a private company and does not make its financials public. However, it has been estimated that the company made $4 billion in revenue in 2021. Market research companies predict TikTok will make around $12 billion in revenue in 2022.[20]

There were reports in July 2022 that TikTok’s parent company Byte dance was facing some difficulties raising money privately from investors. The company had a valuation of $460 billion in 2021 after hedge fund Tiger Global purchased shares in the company.[21] The company’s valuation seems to have dipped to $275 billion or $250 billion based on reports.[22]

However, it’s hard to say if that reflects changes in the company’s fundamentals or the general skittishness of venture capital investors in 2022 since many are anticipating a financial downturn.

TikTok has raised a considerable amount of funding from some very large venture capitalist firms. That includes a 2020 round of funding that was led by Sequoia Capital and KKR and raised $2 billion.[23]

The company seems to be steadily increasing its revenue by introducing new monetization strategies and growing its active monthly users. The app went from making just $63 million in 2018 to $4 billion in 2021.[24] If the company can continue growing its revenue at this rate, it is on track to being an extremely profitable company.

YearEstimated Revenue
2018$63 million
2019$350 million
2020$2.6 billion
2021$4 billion

 

Is TikTok Profitable?

TikTok is likely not currently profitable. While the company does not release its financials, it has been estimated the social network generated $4 billion in 2021 and is expected to generate $12 billion in 2022. However, the app has significant expenses as it continues to grow.

Given that the company is continuing to raise money, it appears like the startup is prioritizing growth over maximizing its profitability. However, given TikTok’s success at attracting, retaining, and monetizing its users, the company is likely on its way to being extremely profitable.

 

Conclusion

The idea behind TikTok was inspired by the world of social media. TikTok is a very sought after mobile app that inspires people to share short videos and interact with other people while doing so.

Its popularity has spread like fire in many social circles, and since it is free, it has become the choice of many. The company has set itself up well for growth and monetization by capitalizing on their target audience with short looping videos that encourage user interaction with branded content, as well as integrating nontraditional (but still valid) revenue sources

Like many other apps, TikTok makes money by selling ads. But the app differs in that it also has a number of other monetization methods. This variety in revenue streams means that TikTok can stay afloat even if one type of revenue stream fails.

The company has set itself up well for growth and monetization by capitalizing on their target audience with short looping videos that encourage user interaction with branded content, as well as integrating nontraditional (but still valid) revenue sources

The biggest problem that TikTok will have to deal with going forward is how to grow in a responsible way and not have their content become regulated by governments and social media sites while still keeping the user experience positive. We don’t know what the future holds for this relatively new platform, but it should be an interesting ride.

To conclude, we hope this article has been educational and informative. We have presented an in-depth look at the business model of TikTok, with a particular focus on the app’s history and how it makes money.

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