Dissecting TikTok's Business Model

In 2020, I used TikTok to promote my book. During my research about content, I had trouble seeing TikTok’s business model. There were no posts marked “promoted.” My TikTok experiment failed, meaning I did not sell any books. But ever since then, I have had an interest in finding their business model. I interviewed THE Brendan Weinstein for the information.

Traditional Social Media Business Model

Most social media platforms generate revenue by tracking user data. Then, they take that data and help companies determine the best users to advertise to.

The ad would show up on user’s feeds as a native post but have an “ad” disclaimer at the bottom.

TikTok’s revenue model is different from other social media platforms.

1. TikTok’s Business to Business Revenue Model

TikTok generates revenue using influencers and brand partnerships.

If I wanted to promote BAIB on TikTok, I would approach the company. Then, they would find an influencer based on my budget and content. The influencer would then do a TikTok dance while wearing a podcast shirt.

TikTok and the influencer would split the money I would give them for the ad.

TikTok users might not notice the videos as ads. Making them more impactful than native ads because people will view the content.

2. Branded Filters

On TikTok, a user can add filters to content. Some brands might create a filter for users to add to their videos. Then, they might pay an influencer to use the filter to get other people to use it. Some brands might create a trend to go with their filter.

On TikTok, users can create audio and upload it for other people to use. One trend with this feature is the “Put a finger down if” game. Some brands will create their own version to play with their filter. The game would get labeled “#BAIBFingerDownGame.”

3. Business to Consumer Revenue Model

The company wants to work with e-commerce platforms. To allow users to buy products on the platform. TikTok will get a percentage of each sale made on the platform.

TikTok could have multiple deals with different e-commerce platforms. An exclusive deal for one platform is another option. An exclusivity deal allows TikTok to ask for a better deal.

4. Expenses for TikTok

Since TikTok has a different revenue model, they have other expenses.

Houses for Influencers - The company has bought several houses for their top influencers to live in. The company has to pay for the house expenses. TikTok needs to pay for the living expenses of the people in the house. TikTok buys their food, maintains the house, pays for their phone and car payments. Influencers need video equipment, photography equipment, and makeup artists to make videos.

Controlling the environment of influencers increases the quality of the content. Since the quality of the content gets raised, that allows a company to charge more for ads. Brands would much rather have their advertisements on a beach in LA in December when the other choice is the snow-filled streets of New York.

5. Alex’s Revenue Generating Ideas

Users Pay to Unlock Features - When I created my TikTok account, I wanted to put a link in my bio. There was no input box where I could add the link.

The platform makes users unlock the feature. Once a user reaches 1,000 followers, they can add a link in their bio.

Giving users the ability to pay for the feature would generate revenue for TikTok. When I was promoting the book, I was making $15 per copy. If TikTok gave me the feature for $10 a month, I would make money if I sold 2 copies a month. Some brands would pay more than that for the feature.

Users Pay to Boost Posts - This is not too different from B2B ads. Users would pay TikTok to get more views.

The issue with this idea is that someone could abuse it. Someone could post an inappropriate video and boost it for maximum views.

The platform would need to create a review process to prevent abuse.

Users Pay for Ad-Free Platform - Users pay to not see the branded posts on the platform.

The issue with this idea is that the most popular influencers on TikTok have branded posts. An ad-free platform will prevent users from seeing the popular people on TikTok. If users see fewer posts, then that will lead to less ad revenue for TikTok. At the same time, brands will expect a discount because their ads have fewer potential viewers.

My Opinion

Brand partnerships are better than native ads. Native ads can get ignored or blocked. For a brand to partner with an influencer, the chances of getting blocked or ignored are less likely. An influencer that brand partners with might lose popularity. Then, the brand can work with another influencer.

Brand partnerships make TikTok, as a platform, look better organized. On other platforms, the ads disrupt the experience and might even look out of place. On TikTok, the ads might be difficult to spot. They do not have that same problem.

On other platforms, small brands might make up sizable revenue. The ads from TikTok are from well-known brands. They have to spend time finding the right influencer. They do not want random sock brands to promote on the platform. A popular influencer wearing a BAIB shirt will look like an obvious ad. This is not the case for Lenovo because they are a household brand.

Limiting advertising adds subtlety to advertising. It is hard for users to notice an ad for Lenovo versus an ad for BAIB. If they did not limit advertising, then there would be 7 ads for Uncle Jimmy’s socks for every Lenovo ad, which would be ruining TikTok’s look. When partnering with an e-commerce platform TikTok needs to maintain its look. Otherwise, they will start to lose users. Users cannot feel as if they are being sold anything.

TikTok might become the main social platform for kids born in the 2010s or later.

Conclusion

TikTok’s competitive advantage is its music. No other platform can give users access to popular songs without legal issues. Anyone can create a popular dance and post it on a platform. But without music, the dance looks out of place. The sound of music catches people’s attention. Other platforms have created their own TikTok feature. But the copycats have not taken users from them.

If it is not clear, I did not spend too much time on TikTok. There’s nothing wrong with the platform. I am a writer, and I like platforms with written content. 😂

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Also published on https://revenueresearch.co/tiktok-revenue.html.