How Does TikTok Make Money? Revenue Model Explained

A company finding itself at the center of a debate at the highest levels of the U.S. government rarely spells anything good for its future. In the case of digital content platform TikTok, there’s a strong political push to force its owner, Chinese company ByteDance, to sell the business to a “qualified” competitor, presumably one based in North America or Europe.

If ByteDance refuses to do so, TikTok’s 170 million American users may have to look elsewhere for a source of online stimulation. The video-sharing app has already been banned in India and Nepal.

Ostensibly, both major U.S. political parties are deeply concerned about TikTok’s potential misuse of users’ private data and its ability to algorithmically promote particular kinds of content, including that with political significance.

However, the many questions about the philosophical underpinning of these political shenanigans and the wider issues surrounding social media’s influence, while interesting, aren’t going to be resolved in this article.

Instead, we’re going to concern ourselves with a more tractable problem: how does TikTok make money? How did it grow to supposedly become an existential threat to democracy? What can TikTok’s business model teach us about the online landscape in general?

Table of Contents Table of Contents

1. Key Takeaways
2. What Does TikTok Do?
3. TikTok’s Business Model 
4. TikTok’s Revenue Model
5. Future Growth Plans
6. TikTok’s Competitors
7. The Dark Side of TikTok: Controversies & Criticism
8. The Bottom Line
9. FAQs
10. References

Show Full Guide

Table of Contents

1. Key Takeaways
2. What Does TikTok Do?
3. TikTok’s Business Model 
Show Full Guide
4. TikTok’s Revenue Model
5. Future Growth Plans
6. TikTok’s Competitors
7. The Dark Side of TikTok: Controversies & Criticism
8. The Bottom Line
9. FAQs
10. References

What Does TikTok Do?

TikTok is a social media platform that showcases short-form video content. Users can create, share, and watch videos that typically last between 15 seconds and a minute but may be up to 10 minutes.

The idea of hosting users’ videos online so that the world may see what they are up to is nothing new. Nor is allowing digital interaction between users anything novel. Combining these two capabilities in an innovative way, however, proved to be a winning recipe, especially when supported by TikTok’s main selling points:

The urge to express oneself – even in the most banal manner – and the desire to be entertained are powerful human instincts.

The majority of the most popular TikTok videos involve people singing, lip-syncing to music, dancing, telling jokes, or performing stunts or pranks. As the typical upload is no longer than a minute, there’s little chance of teaching anyone anything beyond simple “life hacks” or making any kind of reasoned point.

TikTok is happy to leave the market segment that’s interested in more cerebral content to established rival Youtube, a fact that partly explains TikTok’s youthful demographic.

TikTok’s Business Model 

The real currency of content-driven online businesses isn’t pounds or dollars or even renminbi but eyeballs. An established audience can always be monetized at some point in some way, but a great idea for making money online doesn’t mean a thing if you don’t have anyone to apply it to.

The real question is, therefore, not “How much money does TikTok make?” but “What is the secret sauce that grew their regular user base to 1 billion in only 4 years?”

One underlying feature of TikTok’s business model, and in fact that of many comparable businesses, is that running internet servers is really not that expensive, something that becomes even more true at any kind of scale. Though it only reaps a small amount of money from each user, an online service’s total revenue ramps up quite quickly once it exceeds a certain critical mass of popularity.

The company’s management’s core focus is, therefore, not on Tiktok’s profit but on attracting, engaging, and retaining users, a goal reflected in its mission statement.

1. User-Generated Content

Grabbing and holding the fickle attention of internet denizens remains a poorly understood process, relying heavily on unpredictable organic factors. Nobody can truly give you a foolproof recipe for standing out and appealing to the masses in a world flooded by easily digestible amusements. It is in this area that TikTok’s reliance on user-generated content gives it an invaluable edge.

@zachking

They rejected my application to Hogwarts but I still found a way to be a wizard. 🧹#illusion #magic #harrypotter

♬ Zach Kings Magic Broomstick – Zach King

Unlike some digital entertainment platforms – Netflix comes to mind – TikTok doesn’t need to spend any money on writers, filmmakers, or actors. Nor does it need to rely on focus groups, guesswork, and social responsibility guidelines when determining which products are likely to earn money.

Creators strive to take advantage of social trends before marketing experts can even identify them. Successful attempts are automatically amplified, while the many failed experiments don’t affect TikTok’s profits meaningfully.

Though content creators are paid only depending on the success they achieve, the notion of using TikTok monetization as a source of income seems to have broad appeal.

Major brands, another bulwark of TikTok’s revenue model, can also guide the flow of each latest craze by curating “challenges” and encouraging their followers to upload videos of themselves performing some action.

2. Superior Technology

Apart from its impressively slick interface, one of the cornerstones of TikTok’s monetization strategy is the ability to recommend videos users didn’t know they wanted to see. While artificial intelligence (AI) is still a way off from being able to read people’s minds, this company is easily a cut above its rivals when it comes to serving both entertainment and sponsored content to the right users.

Given that a major portion of TikTok’s revenue comes from ads and that one of the best features of digital marketing is that its results are easy to quantify, the importance of this can hardly be overstated. Online advertisers are keen to spend their money where it will show the highest return, and for many market segments, TikTok is a serious contender.

3. Global Relevance

Serving a resource to a user in Bangladesh is no different from reaching one in Birmingham.

The infrastructure needed and strategy followed are much the same in either case. Expanding globally was a cinch once Douyin, TikTok’s older sibling directed at the Chinese market, proved to be a runaway success and validated the model.

That having been said, each market does present its own challenges. A video that’s popular in Ipswich may not fly, for both cultural and regulatory reasons, in Indonesia. Short of outright government bans – which are certainly being considered in many countries – user-generated content again comes to the rescue.

The same proven formula is applicable in many national contexts, and there’s very little latency between independent content creators and advertisers embracing this platform and consumers flocking to it.

Before long, and not least due to the company’s willingness to promote itself aggressively, thousands of people are wondering how to get paid on TikTok, further increasing its attractiveness as a marketing channel.

TikTok’s Revenue Model

It can be said that this company’s competitive advantage is built on the level of connection it offers. Unlike some other content-sharing platforms, consumers aren’t limited just to “liking” a video, sharing it with friends, or leaving a comment, but can seamlessly interact with its creator or click through to their online store.

Users aren’t left feeling that their only role is to passively absorb entertainment; instead, those who wish to can be active participants in a dynamic community.

Its appeal to the general public aside, though, TikTok’s profits depend on connecting those willing to spend money with those who have something to spend it on.

In accordance with its strategy of building a large, robust user base, the app itself is completely free, though the possibility of a subscription-based, ad-free version has been investigated.

Several other sources of income are available to the company. Though these aren’t diversified in the sense of being independent of the TikTok platform itself, having a variety of revenue streams does serve to stabilize the platform’s earnings.

Advertising

“Don’t make ads, make TikToks” is the slogan ByteDance uses to encourage companies to make use not only of their platform’s marketing reach, but also its unique capability to harness crowdsourcing as an advertising force multiplier.

User-created videos praising some product or brand are seen as far more authentic than traditional ads, providing a form of social proof that’s hard to obtain elsewhere.

In order to get the most out of this powerful tool, TikTok offers a variety of paid products to businesses, including:

More importantly, it has gained a reputation for intelligently analyzing users’ preferences, app interactions, and information from other sources to craft highly granular consumer profiles. This allows for more accurate targeting of even the narrowest market segments, ensuring that each pound spent on TikTok advertising stretches a little further.

The cost per click (CPC) for TikTok ads currently runs to about 2 pence, making them quite affordable considering their performance.

The app also shines in terms of another metric digital marketing experts like to use, namely average session length. This is over 10 minutes, amounting to almost an hour of screen time per user per day.

However, if you’re thinking of climbing onto the TikTok advertising bandwagon, you should know that simply throwing money at marketing remains an imperfect practice; using this platform efficiently still requires some judgment.

In-App Purchases and the TikTok Economy

How does TikTok make money without ads? Third-party advertising spending, amounting to over £10 billion per year, is certainly the mainstay of TikTok’s business model.

However, given the inherently volatile nature of the online marketing landscape and constantly shifting consumer and advertiser preferences, the company has wisely exploited other sources of income.

One of these lies at the core of its strategy of attracting content creators through a revenue-sharing model. TikTok’s Creator Fund, for instance, rewards those who post videos based on the number of views they achieve.

Popular creators are also more likely to be contacted by brands and advertisers, opening additional earning opportunities. It seems, however, that TikTok felt that it was appropriate to provide another incentive to successful content creators, creating an additional revenue stream in the process.

Although those who post videos aren’t explicitly supported by fans along the same lines as with Patreon, TikTok does allow appreciative users to reward artists whose work they enjoy with gifts bought with an in-app currency that’s exchangeable for real money.

Given that these “gifts” usually amount to nothing more than pixels on a screen, TikTok’s input costs are quite low, while the platform charges a small fee on each purchase of “TikTok coins” and retains between 50% and 70% of the cash value each time a creator makes a withdrawal of their “diamonds.”

Finally, after being the first company to successfully integrate video hosting with expansive social media features, TikTok took the brilliant step of adding e-commerce to the mix.

With its existing user base, it already has a leg up on platforms like Etsy and Shopify.

Allowing content creators to open their own online stores with a distinct absence of hassle and paperwork seamlessly merges their efforts at publicity with a new kind of shopping experience.

Naturally, TikTok takes a commission on each transaction. Usually being under 5%, this apparently hasn’t been onerous enough to impede the meteoric expansion of TikTok Marketplace’s sales volumes.

How Does TikTok Make Money From Partnership & Sponsorship Deals?

In the entertainment economy, exposure and brand awareness are almost as valuable as actual income.

TikTok, therefore, makes a habit of partnering with celebrities for their mutual benefit, especially when expanding into a new territory. Both parties receive a payoff both monetarily and in terms of publicity and online traffic.

In addition, TikTok encourages major advertising and consumer behavior analysis companies to enter into formal agreements with them, allowing them to get the most out of the platform, track the success of campaigns more closely, and provide creative and technological support to smaller advertising agencies and individual businesses.

Future Growth Plans

How much is TikTok worth today? The valuation of online businesses that aren’t publicly listed is notoriously tricky. Guesses range from $20 billion to over $100 billion, The Wall Street Journal reported on April 25.

However, Statista estimated that TikTok’s brand was worth $84 billion in 2023. It stated in February 2024:

“ByteDance’s triumphant TikTok/ Douyin is one of the most successful Chinese brands that have made its name beyond borders. The short video brand enjoyed immense popularity around the world, surpassing Instagram and WhatsApp to be the most downloaded mobile app. In 2023, the brand value of TikTok/Douyin amounted to 84 billion U.S. dollars. It was the most valuable unicorn worldwide in 2023 with a market cap of 200 billion U.S. dollars.”

This figure, as well as the size of TikTok’s revenues, has shown staggering growth over the past five years.

TikTok generated an estimated $16.1 billion in revenue in 2023, a 67% increase year-on-year.

It’s unlikely that this trajectory can be sustained, though, if for no other reason than that TikTok has practically saturated its market, with roughly 20% of all people who use the internet having the app installed. There just aren’t enough potential new users left to convert.

In addition, as a private company in a highly competitive, fast-moving industry, ByteDance has tended to remain tight-lipped about its future plans.

For the moment, we can assume that they’re playing a defensive game and hoping to hold on to what they have, refining and optimizing TikTok’s existing features, consolidating their user base, and perhaps launching other digital offerings connected to but separate from their flagship product.

TikTok’s Competitors

TikTok’s dominance in the micro-entertainment market is well-entrenched, making it difficult for any johnny-come-lately to make significant inroads.

There hasn’t been any shortage of attempts to emulate its success, though. Several other startups and established tech brands have launched comparable products.

It seems that, in the online sphere, being first and growing quickly is the best way to insulate yourself from any serious challenge.

The Dark Side of TikTok: Controversies & Criticism

Social media of any kind is inherently prone to abuse. Allowing users to give voice to whatever happens to be on their minds has numerous advantages from a business perspective, but also leads to all kinds of problems when creators become antisocial or break the law.

The same, of course, can be said for all social media platforms, not to even mention a decline in the quality of public discourse and young people’s attention spans.

Unfortunately, the only real countermeasure to issues involving harmful content is to hire human moderators, which would eat into TikTok’s profit margin. The cost of not doing anything may turn out to be even greater, though.

One cautionary tale, courtesy of blogging platform Tumblr, is about how it allowed itself to become overrun by adult-oriented material only to suddenly ban all forms of NSFW (Not Safe for Work) content, causing a large chunk of its user base to abandon the website overnight.

The Bottom Line

How does TikTok make a profit? Essentially, it gives people what they want: instant access to entertainment tailored to their needs that can be enjoyed in a free moment, as well as the opportunity to reach, potentially, millions of individuals who share their interests.

The allure of being part of a virtual community, something that underpins the whole concept of social media, has certainly worked in their favor.

FAQs