Ever wondered how does TikTok make money? We take a closer look at TikTok as a business and find out how the social media giant makes money.
Undoubtedly, TikTok is one of the most influential social media platforms today. A typical person spends close to 20 hours on TikTok each month. That figure is even upwards of 25 hours in the United States, United Kingdom, and Russia. With its popularity, it’s safe to assume that even 15-second videos on the platform have a huge impact on user behavior, especially when it comes to online purchases.
According to Statista, global TikTok users spent $824M in the fourth quarter of 2021 alone. If you would look at all the businesses that leverage TikTok as a critical part of their digital marketing strategy, you can imagine the massive potential income of the social media giant. But if you want to do more than conjecture, read on to find out how TikTok generates revenue.
What is TikTok?
TikTok is a highly successful social media app that allows users to create, share, and discover videos. Initially available only in China, the social media platform quickly gained immense popularity internationally through its lip-sync voiceover videos/skits. When Musical.ly, the company that owned TikTok, was bought out by the Chinese internet giant ByteDance in the latter part of 2017, the app got the technological leverage it needed to become viral. With a billion active users every month, TikTok has become a tremendous success, surpassing Twitter with 3 billion downloads in the first quarter of 2022 alone.
A lot of young people use the app to create short-form videos, which can be anything from dance to stunts, comedy, and more. Brands also use it to feature their products and services, launch ads and marketing campaigns, and connect with their audience.
How TikTok generates revenue using in-app purchases
You may have been using TikTok for a while now without shelling out anything to use the platform. So you might wonder how the company earns any income if anyone can just download its app for free. One effective way that TikTok generates revenue is through In-App purchases.
To make In-App purchases on TikTok, you’ll need to buy TikTok coins (the app’s virtual currency) with fiat money (that’s your dollars or whatever real-world currency you have). With these coins, users can make In-App purchases of “gifts,” like “hand hearts” or “confetti.” They then give these to their favorite TikTok creators on a live stream to show appreciation for amazing content.
Once users send these “gifts,” they are converted into “diamonds” on the recipients’ profiles and serve as virtual currencies. These gems help measure the popularity and influence of TikTokers, who can exchange or “withdraw” these “diamonds” as real money.
Sales of TikTok coins have shot through the roof, from total In-App purchases worth $1.5million in May 2018 to $78 million by May 2020. As of January 2022, the cost of TikTok coin bundles (which is how they are sold) is as follows:
- 70 coins: $1.09
- 350 coins: $5.51
- 700 coins: $9.58
- 1,400 coins: $21.34
- 3,500 coins: $53.78
- 7,000 coins: $110.52
- 17,500 coins: $243.17
How does TikTok make money from TikTok Ads?
In June 2020, TikTok launched “TikTok for Business” to enable brands to leverage the popularity of the video-sharing app to advertise. Examples of ads within the TikTok platform are in-feed ads, spark ads, and branded hashtag challenge ads.
By using TikTok to promote their products or services, many brands can make meaningful connections with their audiences and boost sales. Big companies that have run successful marketing campaigns through TikTok ads include Pepsi, Chipotle, Stella McCartney, and the NBA.
Although TikTok does not give away how much they charge for ads, it’s reported that TikTok ad rates vary from campaign to campaign. Companies can typically customize what they want to spend or bid on ads. On average, those who advertise on TikTok are said to shell out $10 every CPM (cost per thousand impressions on a web page) and $500 per ad. This amount can, of course, change depending on the type of ad format and duration. For a full campaign, costs can range from $50k to 120k.
How does TikTok generate money from the coins they sell?
First off, TikTok earns when it sells TikTok coins to its users, who will use the currency to purchase “gifts” for the TikTok stars they admire. Once sent, the app automatically converts these “gifts” into “diamonds” to monetize TikTok creators. The TikTokers can then convert the “diamonds” into real money by withdrawing from selected payment channels like Paypal and Zelle. However, TikTok will keep 50% of the amount withdrawn, which is another way it generates money from its In-App purchases. Do note that there are certain conditions the TikToker must know and comply with before making a withdrawal:
1. The diamond’s conversion value depends on TikTok’s discretion as stated under the app’s policy.
2. Each withdrawal should be a minimum of $100.
3. The preferred payment channel may also charge fees.
What is the TikTok revenue and business model?
The social media app uses an effective three-pronged TikTok business model that leverages three sources of revenue: TikTok In-App purchases (TikTok coins), TikTok E-commerce, and TikTok ads. This comprehensive TikTok business model continues to generate a massive amount of money. For example, in 2021, TikTok owner ByteDance, generated about $4.6 billion, a growth of 142% versus the previous year. Let’s delineate each of the three main components of its revenue model:
Advertising model (TikTok Ads)
Advertising is one of the primary income sources of TikTok. Different businesses leverage the power of the platform’s ads to reach and connect with their specific demographic, build brand awareness, and drive sales.
In-App Purchases model (TikTok coins)
As we’ve mentioned, TikTok profits from the popularity of TikTok influencers or content creators, earning a 50% cut from every “diamond” these TikTokers receive from their fans or followers.
E-commerce model (online sales)
Brands can promote and sell their products or services directly to millions of users on the TikTok platform. Although the agreement that TikTok has with each merchant varies, it’s safe to assume that the social media app gets a percentage out of the sales amount as a kind of affiliate.
Additional revenue models used by TikTok to make money
Like any canny business company worth its weight in gold, TikTok has other cash cows in addition to its profitable three-pronged TikTok business model. We’re referring to licensing deals.
Although the details of TikTok’s licensing agreements are kept in confidence, you can expect that the deals they have successfully closed with such industry leaders as the Universal Music Group and the Warner Music Group shows aren’t chump change.
TikTok also strikes well-paying agreements with artists whose music the app helps popularize. Musicians know that songs often used in TikTok videos end up on the BillBoard 100 or Spotify Viral 50. The artist also gets a share when their music is used by creators as part of their short-form videos. The amount is reported to be based on the subscription revenue and the terms in the blanket agreement between TikTok and the label or artist. However, for a ballpark figure, you may estimate a TikTok royalty payout to be worth about $0.30 per view.
TikTok’s revenue and business model encompasses not just one or two but four income streams for the immensely successful social media app. By leveraging In-App purchases, online sales, advertising, and licensing and royalty agreements, TikTok has optimized its earnings from content creators. This also translates to multiple revenue opportunities for the TikTok influencers themselves.
To learn more about Tiktok and gain insights into the social media business, read the Net Influencer blog.