TikTok, developed by ByteDance in China, is a short video-sharing platform that has seen rapid growth since its launch in 2016. By 2024, TikTok’s growth is estimated to continue at an exponential rate, exceeding $6 billion in revenue. Despite its rapid growth, many still wonder how TikTok generates such substantial profits. So how does TikTok make money? In this article, I will give you a closer look into TikTok’s revenue stream to understand its strategy better.
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What is the TikTok Business Model?
TikTok has provided users a fresh opportunity to showcase their talents, unleash creativity, and promote content. Its secret lies in short, entertaining videos that keep users engaged with endless scrolling. The platform includes a powerful video editor packed with various effects and sounds.
While most are familiar with TikTok, its revenue model remains a bit of a mystery. However, using the app offers some insights into how TikTok generates income.
TikTok makes money by combining several revenue models within their company, which are:
- Advertising-based business model
- Digital goods business model
- Commission-based business model
Advertising-based business model
TikTok primarily makes money through advertising, selling ad space to businesses and marketplaces to promote their products. In 2023, it earned $13.2 billion from ads. TikTok offers various ad formats, including in-feed ads, brand takeovers, top view ads, branded hashtags, and branded effects.
Digital goods business model
Selling digital products is a low-risk and often enjoyable business model. TikTok introduced its own virtual currency – TikTok Coins, which users buy with real money. When consumers exchange their real money for TikTok Coins, they can make gift purchases for content creators as a token of appreciation. For 99 cents, a person can acquire 100 TikTok Coins.
Commission-based business model
When a user buys coins and virtually donates them to a content creator via the app, the content creator has the option to withdraw all tips handed to them in return for real money. And TikTok takes a 50% share of every dollar withdrawn from the app when users withdraw payments.
How Does TikTok Make Money?
Since TikTok is still in its early stage, it hasn’t disclosed much information about its monetization system. However, TikTok does make money through there main sources of revenue: advertising, in-app purchases, and eCommerce offerings.
TikTok Advertising
TikTok Ads account for the majority of TikTok’s revenue over the year. It offers a variety of ad types, such as:
- In-Feed Ads: These ads blend seamlessly into the feed, similar to Instagram ads, and appear as users scroll through videos.
- Brand Takeover Ads: These ads appear immediately when the app is opened, taking over the full screen. They are designed to boost brand recognition and deliver instant messages.
- Top View Ads: Top View Ads show up after users scroll for a bit. Like Brand Takeover ads, they take up the entire screen, auto-play, and can run for up to 60 seconds.
- Branded Hashtag Ads: TikTok leverages its popular challenges and trends by turning them into a revenue stream. Creators are invited to make videos featuring specific hashtags or brands, which is both fun for users and effective for brand promotion.
- Branded Effect Ads: TikTok’s signature video effects are also used for ads, including custom stickers, AR filters, and lenses. Users can create videos with these effects, but they have just 10 days to do so, promoting the brand within that time frame.
TikTok charges for advertising from businesses and brands that use its platform to promote their products or services. The platform earns money through various ad formats above, where advertisers pay based on the number of impressions, clicks, or other engagement metrics.
TikTok In-App Purchase
How does TikTok make money without ads? Before the introduction of TikTok for Business, in-app purchases (TikTok Coins) were the primary source of revenue. Creators with at least 1,000 followers can earn virtual presents from their fans by broadcasting a live video under this scheme.
If fans enjoy their content, they can tip them with virtual gifts. However, each gift is worth a certain number of virtual coins, which must be purchased with real money via the app. They can use these coins to send presents to their favorite content providers. This will assist TikTok as well as the TikTokers who receive TikTok Coins.
eCommerce Offerings
TikTok makes money through its e-commerce offerings by allowing businesses to sell products directly within the app through features like TikTok Shop and shoppable ads. These tools enable brands to create a seamless shopping experience for users, where they can browse and purchase items without leaving the platform. TikTok earns revenue by taking a commission from each sale made through its e-commerce features.
Here, I want to talk more about TikTok Shop. According to TikTok, when TikTok Shop was first launched, the feature was primarily intended to assist small enterprises that had not yet established brick-and-mortar stores due to hefty investment expenses. However, the increasing popularity of TikTok and TikTok Shop excites small businesses and big brands to join the game.
TikTok Shop allows brands to sell in two ways:
- Directly promote and sell their products: through live streaming or short videos with product links integrated within the posts. When a customer clicks on the product, they are directed to the product detail page. Brands will be responsible for generating and publishing their own content under this option.
- Through the TikTok Affiliate program: If a brand decides to engage in the affiliate program, they can build promotion programs and encourage TikTok content creators to promote their products for a fee. The service would make it easier for influencers to earn commission on sales that they enable.
As of 2024, the transaction fee for most regions, including countries like Malaysia, is around 3.78% of the total order value, including shipping. Additionally, TikTok Shop charges a commission fee, which ranges from 2% to 8% based on factors like the seller’s sales volume and product category. These fees contribute significantly to TikTok’s overall revenue from its e-commerce activities
What Cut Into TikTok’s Revenue?
Several factors have affected TikTok’s revenue growth, despite its rapid rise. One key challenge has been increased regulatory scrutiny, especially in countries like the U.S. and India, which either restricted or banned the app due to concerns over data privacy and national security. These geopolitical tensions have reduced TikTok’s ability to fully monetize its global user base.
Additionally, TikTok’s shift toward funding platform discounts and heavy investments in e-commerce to compete with giants like Amazon and Instagram has strained its profitability. These discounts, meant to attract more sellers and users, eat into potential ad revenue and commission earnings.
Lastly, rising operational costs associated with expanding into new markets and maintaining a global infrastructure have further squeezed the platform’s profits.
Future of TikTok
TikTok has grown rapidly since its launch, leading competitors like Facebook and Instagram to introduce their own short-video features. Looking ahead to 2024, TikTok’s gross merchandise volume (GMV) is projected to reach $23 billion, driven by its increasing integration of shopping features and partnerships with brands.
TikTok has introduced TikTok For Business and TikTok Shop, enabling brands to showcase and sell their products directly on the platform without redirecting users to external sites. This presents a significant opportunity for businesses that leverage TikTok effectively. With TikTok’s broad appeal across all age groups, brands have more opportunities than ever to engage with customers. If you’re considering joining TikTok, now is the perfect time to seize the opportunity and ride the wave of this growing trend.
>>> Read more: What Is Next On TikTok: New Earning Options For Creators
Wrap-up
The uniqueness of the TikTok Business Model gives TikTok the edge to come out on top of social media platforms in recent years and even in the future.
Brands can now access clients through a new level of interactive engagement with TikTok For Business, which will undoubtedly increase your business if you know how. As a TikTok agency, Mega Digital knows how to help you stay in the game and stand out from the pack with our TikTok Business Account Renting, TikTok Ads Services, and more. We are proud to say we can provide clients with the greatest insights to help them enhance their campaigns.
