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TikTok Business Model: How TikTok Makes Money

TikTok changed the social landscape in more ways than one.

Firstly, TikTok holds the record for being the fastest-growing social media platform ever. Launched in 2016, the app attracted over 3 billion downloads and captured one-third of all social media users in a short span of fewer than four years. To put TikTok’s growth into context, it took Facebook & Instagram almost a decade for the same.

Secondly, TikTok is one of the rare top social media platforms to emerge out of China. Before it came into the picture, all major social media companies were born in the US.

Thirdly, TikTok’s virality, in a way, forced Instagram to launch Reels & YouTube to launch Shorts, in a bid to catch up to the short video craze. In fact, there were reports in 2022 that Instagram would be prioritizing videos like never before at the cost of even trying to move from its photo-sharing positioning(After a one-year pilot, Instagram is now going to focus on photos equally). Facebook, the leading social giant, even launched its own short-video app Lasso in November 2018 to compete with TikTok but shot down Lasso after it failed to replicate TikTok’s success.

In this blog, we will trace TikTok’s journey from its early days, how it climbed up the rank to script an incredible growth story & wrap it up by discussing how TikTok makes money towards the end of the piece.

TikTok’s Founding & Growth Story

Today, we all know that TikTok is a short-video app used by youngsters all around the world, but it didn’t start under the name of TikTok. It first began under the name Douyin, launched in 2016 to the Chinese market by the Beijing-based company ByteDance. 

Similar to Facebook, ByteDance is a Chinese company that owns several other popular networking apps, and it was founded in the year 2012 by CEO Zhang Yiming, a former Microsoft engineer and serial entrepreneur. 

Just within a year of its launch, Douyin soared to 100 million users and in 2017, it launched iOS and Android versions in international markets under a new name — TikTok. 

Soon after its launch, TikTok reached 500 million global active users and rose to the top of the charts in many Asian markets. In 2018, TikTok ranked No.1 among free app downloads in app stores in Thailand and ranked fourth worldwide as the most downloaded non-gaming app.

However, while TikTok was rapidly growing in popularity all over the world, another short-video app had already risen in the U.S. — Musical.ly, which launched in 2014 and allowed users to create 15-second lip-syncing music videos. 

Towards the end of 2017, TikTok’s parent company, ByteDance purchased Musical.ly for about $1 billion and operated Musical.ly and TikTok as two separate social media platforms until August 2018.

To create a larger user base and officially enter the US market, TikTok merged with Musical.ly in 2018. All existing Musical.ly profiles and data were consolidated into TikTok and Musical.ly was shut down. 

Soon after that, in October 2018, TikTok became the most downloaded app in the US and became the first Chinese app to achieve this feat. Then at the beginning of 2019, TikTok and Douyin together reached one billion app downloads all over the world, excluding Android installs in China. 

One major reason why the number of TikTok downloads sky-rocketed was due to its popularity in India, which contributed to about one-quarter of TikTok’s total downloads. 188 million TikTok downloads were attributed to India in just the first quarter of 2019, surpassing even Facebook at 176 million. However, the Indian government banned TikTok in 2020 after tensions with the Chinese government rose, and the ban has remained since then.

In 2020, TikTok became the most downloaded non-gaming app in the United States in January. After the TikTok India ban, China ( where TikTok operates under the name Douyin) & the USA remain their biggest markets in terms of users. 

In recent years, TikTok has transitioned itself to look more like a super app, where users can not just watch videos, but do a bunch of other activities like buy things, play games and a lot more.

TikTok’s Business Model

TikTok makes money from Advertising, Subscriptions, In-App Purchases, ECommerce Offerings & Music Royalties. Subscriptions give creators the ability to sell their content, in-app purchases allow users to buy virtual in-app coins, and e-commerce offering includes revenue for acting as an affiliate. Advertising and Music Royalties are self-explanatory.

With a brief explanation of TikTok’s business model done, let’s take a deeper look into each of these revenue streams to understand TikTok’s monetization strategy better.

TikTok Ads

Like any other social media platform, Advertising is one of the primary revenue avenues for TikTok. TikTok has the following types of ads: In-Feed Ads, Brand Takeover Ads, Top View Ads, Branded Hashtags, and Branded Effects. Here is a detailed explanation of the different types of ads advertisers run on TikTok.

TikTok In-Feed Ads

In-feed ads are short video ads shown in the user feed as they scroll through the “For You Page”, which is full of content personalized for the user. These ads, similar to the ones that appear in Instagram Stories, blend natively with the TikTok feed. 

TikTok Brand Takeover Ads

As is evident from the name, TikTok Brand Takeover ads take over the entire screen as soon as users open the app. These types of ads are used to create mass awareness & drive sales by showing them to their target audience.  

TikTok Top View Ads

TikTok Top Views Ads are similar to TikTok Brand Takeover ads, except that they do not cover the screen as soon as users sign in; they show up in the first In-feed post after 3 seconds. These full-screen ads with auto-play and sound last up to 60 seconds, helping increase brand exposure.

TikTok Branded Hashtag Ads

Shown on the discovery page, Branded Hashtags ads involve engaging users by asking them to create a video dancing or doing something else in line with a particular product. After creating these quirky videos, users post them with a predefined brand hashtag. A cool format, Branded hashtag ads help create awareness, while at the same time, turning it into a fun activity.

TikTok Branded Effect Ads 

Branded Effects include custom stickers, augmented-reality filters, and lenses, which users can also add to their videos. TikTok allows these effects to stay live until up to 10 days, giving users a long enough time to interact with the brand. 

2. TikTok Coins

Another source of income for TikTok is virtual coins through which both TikTok and TikTokers can earn money. TikTokers that have at least 1,000 followers can earn virtual gifts by broadcasting a live video. 

If users like their content, they can send virtual gifts as tips to them, but each gift is worth a certain amount of coins and the users have to purchase these coins with real money through the app. Then they can use these coins to send gifts to their favourite content creators.

These coins start at 100 for $1.29 but prices are subject to revisions and may differ across countries. Users can use these coins to buy virtual gifts ranging from Panda which is worth 5 coins to Drama Queen which is worth 5,000 coins. TikTokers receive gifts given by users in the form of diamonds.

A diamond is 50% of one coin because TikTok charges a 50% commission before adding the rest of the money to the TikToker’s account. So, if a TikToker has diamonds worth $500, he will more or less get $250 for himself, and the remaining $250 will go to TikTok. TikTokers can only withdraw their money once they have reached $100 and can’t withdraw more than $1,000 in a day.

3. ECommerce Offerings

In recent years, one of the big trends in the social media space has been easing the facilitation of e-commerce and TikTok has also gone the same route.

At the time of writing, users can make purchases directly from TikTok. Products are shown to users in different placements like in-feed videos, live streams, and a product display tab, which is featured on the profile page of the seller.

As one can guess, TikTok makes money by taking a percentage of the sales amount for acting as the affiliate, as other social media platforms like Instagram do. Allowing users to make purchases right within the app reduces the friction involved in redirecting users elsewhere and gives a boost to conversion rates that would otherwise be negatively impacted. While the commission varies from country to country, it is typically set at 5% of the sale.

4. Subscriptions

In early 2022, TikTok started allowing creators to sell their content via subscriptions.

Creators can sell a product called a live subscription in a range of $0.99 to $99.99 per month, wherein subscribers can access a host of perks like exclusive subscriber badges, custom emotes designed by creators and a subscriber-exclusive chat.

While Tik Tok does not disclose fee structures, it is likely that the platform takes a cut of the fee that creators take from fans.

5. Music Royalties

With TikTok’s insane popularity, many new artists are being discovered through the platform. To bank on this trend, TikTok announced the launch of SoundOn, a music marketing and distribution platform that enables artists to get their music heard.

While artists retain 100% of their music rights for the first two years, TikTok gives artists only 90% after two years, meaning TikTok will get the remaining 10%.

TikTok Revenue & User Stats

In 2020, TikTok generated an estimated $2.6 billion in revenue, a 457% increase from the $350 million it generated in 2019. In 2021, TikTok generated $4.6 billion, a 142% increase year-on-year. In 2022, TikTok generated a revenue of $9.4 billion.

As of 2022, TikTok has 1.4 billion monthly active users worldwide, meaning 30% of the 4.62 billion active social media users use TikTok on a monthly basis. Since it was launched in 2016, TikTok has been downloaded 3 billion times, making it the first app outside of Facebook to reach the milestone of 3 billion downloads.

TikTok Investors

Bytedance, TikTok’s parent company, which also runs a bunch of other apps like Toutiao, Xigua Video & BytePlus, was valued at $180 billion after it raised $2 billion from US Venture Capital Firm and KKR & Co in Dec 2020. Prior to this round, Bytedance had raised $3B in Oct 2018, $2B in Aug 2017, $1B in April 2017, $100 million in Jun 2014 & $5 million in July 2012.

As of 2023, Bytedance was valued at around $225 billion.

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TikTok Business Model: How TikTok Makes Money
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TikTok Business Model: How TikTok Makes Money
TikTok makes money from Advertising, Subscriptions, In-App Purchases, ECommerce Offerings & Music Royalties. Subscriptions give creators the ability to sell their content, in-app purchases allow users to buy virtual in-app coins, and e-commerce offering includes revenue for acting as an affiliate.
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Muaaz Qadri
Muaaz Qadri
A Proud Computer Engineer turned Digital Marketer