TikTok Business Model & Revenue Model to Consider for a Startup

TikTok business model has been quite popular all over the world. The business is now growing geographically and in size, having a formidable sustainable user base at its core. Now it seems like a mature successful giant, so one would naturally wonder what use its case study might have for a startup. First, TikTok’s case is extremely interesting for its ad-based business model. TikTok’s advertising is often much more engaging than others. For example, click-through rate – CTR. The usual advertising CTR is around 0.1%. If it is personalized, CTR can reach 2.3%. On TikTok’s platforms, it can be 16-17-18%! Advertisers love a good return on their investment.

Additionally, TikTok has two more monetization channels. They are in-app purchases and e-commerce integrations. For creators, there are endless opportunities to create sponsored content through partnerships. 

However, the most usefulness comes from reviewing the TikTok business model for those startups that aim at MLP – Minimum Lovable Product. This is what forms the foundation of TikTok. It started out as a social networking website to enable user-generated content. Sure, a website hosting users’ videos was not new even then. So what made TikTok stand out? TikTok provided features to create short videos with editing toolkit and filters. Editing a video is a time-consuming and effort-intensive part that TikTok solved for its users. As a result, this created an entire community of users who just loved it. It grew exponentially from here. It spread over borders and came to have an entire culture formed around it. Though, it is not all there is to it. 

In this article, we’ll examine TikTok business model & revenue model in greater detail. 

TikTok Origins – Douying and MLP (Minimum Lovable Product)

At first, Douyin was the name of today’s global business. ByteDance launched it in 2016 in China. A Chinese media hosting company started a social network focusing on enabling users to generate video content. 

The platform included functionality to record your own video. However, the key was powerful functionality to edit content to make it interesting and entertaining. The format is as follows:

• 3 to 60-second videos. 
• video can be sped up or slowed down.
• users could apply filters and effects to the video. 
• they could select background music from the vast collection.

Also, their app’s interface was focused on swiping rather than tapping. Yet another fun element.  

MLP Development

• As a matter of fact, the Douyin app took 200 hundred days to develop. 
• Subsequently, 300 more days were needed to achieve 1 billion views daily. 
• Out of these 300 days, the first seven months were testing, dealing with technical issues, adding more video effects and stickers, and refining the app. All of it was fueled by feedback from app early adopters. This is pretty standard for any MVP, MLP, or MMP. To create one for yourself, you can check out Startup Services, 
• At this stage, another key move was integrating the app with popular Chinese messengers. That move enabled users to showcase their nicely edited videos. And it also allowed the app to gain popularity. 

So, 1 billion daily views was a remarkable success by any measure. At this stage, the MLP stage was successfully completed and it was time to scale. 

Presently, Duoyin app functions today as Chinese TikTok. To create an international version, ByteDance bought a Shanghai startup Music.ly with an office in Santa Monica, California for $1 billion. Chiefly, this became TikTok in its scaling stage. Finally, celebrities and brands started to recognize the reach TikTok had been getting. And the rest is history.

TikTok Revenue Model

• As TikTok’s MLP stage was getting to a close, a few prominent companies and celebrities joined the app for advertising.  The first companies to launch their ads on TikTok were Airbnb, Chevrolet, and Harbin Beer. This laid the foundation of its ad-based business model. 
• Additionally, to encourage creators, TikTok introduced another substantial monetization source in 2017. TikTok released the live stream feature and viewers were able to send virtual gifts. 
• Lastly, as TikTok’s popularity grew, e-commerce integration was added as another way of monetization.

Let’s break down each of these.

Ad-based business model

Brands and companies can:

•  place in-feed ads, 
• use branded hashtag challenges, and 
• use branded effects. 

The overall data and projections for advertising revenue are shown below. The leap from $4 billion in 2021 to $11.64 in 2022 was almost three-fold growth. This inspired further projections on the graph. However, 2023 data was 25% lower than projected, yet still 13% compared to the previous year. As you can see, the projected number was $18.04 billion while the actual was $13.2. Still, the growth is impressive.

Figure: TikTok advertising revenue from 2020 to 2022 and projections from 2023 to 2027

In the next section, we’ll discuss how 2020 became a take-off year for TikTok. For now, let’s discuss the way businesses advertise on TikTok.

In-feed ad

Balenciaga’s in-feed ad managed to garner 4.5 million shop page visits with over 25 million views. In-feed videos are short, up to 60-second videos, with a call-to-action button. Overall, companies manage to achieve great brand visibility, reduce customer acquisition costs, and increase sales. In addition, it helps to grow a community around the brand and strengthen the following. Although there is rarely a company that uses TikTok exclusively for its advertising, TikTok has become a priority channel for many.

Branded hashtag challenges

Branded hashtag challenge is one more great way to increase brand engagement and drive brand awareness. For instance, Guess created a challenge encouraging TikTokers to create a video of their denim outfit. Consequently, the challenge quickly gained traction. The challenge ran for only 6 days. During that time, in fact, the users submitted 5.5 thousand videos for the challenge. As a result, 10 million views were collected by Guess. The hashtag was  #InMyDenim. The success story is notably featured on TikTok with the following metrics:

• Total engagement rate 14.6%
• 12k+ followers
• Click-Through-rate (CTR) of 16.5%.

Branded effects

Presently, branded effects are pushing the novelty developments in AR. One of the standout campaigns was launched by Samsung on TikTok. Markedly, Samsung created a branded effect supplemented by AR, randomization, and gamification. To use this effect, a user had to activate their TikTok camera in a selfie mode. Samsung’s Galaxy S21 FE 5G would appear all animated in front of the user. Then, there would appear a wheel that a person can spin (gamification). This wheel would produce an exciting descriptive attribute for the user (randomization). The resulting video would be fun and exciting to share with the community, and many did. As a result, the branded effect generated 26 million views. Users played with the branded effect on average for about 90 seconds. Samsung got 7.5k new followers.

Virtual gifts

When it just appeared, TikTokers with a follower base of more than 50,000 could do live streams. Now the threshold is only 1,000 followers. The followers can purchase TikTok coins and use those to buy a variety of gifts for their favorite creators. TikTok takes a percentage of the coin purchase. TikTokers themselves receive 50% of the gifts worth.

In the graph below, you can see TikTok’s revenue data from in-app purchases. Here too you can see a breakpoint in Q4 2019 that signified a huge increase in revenue growth rate. By analyzing the charts, you can clearly see that it was around mid-2019 when TikTok started to take off globally. Moreover, 2020 was the year when the growth solidified so it was no more considered a transient event.

Figure: TikTok In-App Purchases revenue from 2018 to 2023, quarterly data

E-commerce integration

TikTok shops is a newer monetization channel of all. In 2023, it generated about $2 billion in gross merchandise volume (GMV). 2024 plans are to increase this number 10-fold – $17.5 billion in GMV for the US. This is a newer part of TikTok revenue model but it is well-supported by TikTok Business Model. One can logically imagine e-commerce being an extension of an ad-based business model.

TikTok Business Model

Here is TikTok Business Model at a glance.

Revenue streams

As has been noted, three key revenue streams are:

• Advertising,
• In-app purchases,
• E-commerce integrations.

Cost structure

In terms of TikTok’s spending, TikTok business model requires to continuously:

• Develop its app and functionality including research (R&D),
• Pay for data storage (around $6 billion annually),
• Maintain its servers (around $500 million annually),
• Moderate its content,
• Make sure content is licensed under local laws,
• TikTok’s own user acquisition which includes customer acquisition costs and its TikTok Creator Fund.

Overall, the cost side is hard to calculate, but experts estimate it to be up to 80% of its revenues as of 2022. Which is why TikTok is looking to increase its revenues with e-commerce integration. 

Value proposition of TikTok business model

• For users, TikTok offers a wide range of free entertainment, mainly short videos, community, culture, and finding content that resonates. 
• For creators, TikTok offers a video editing toolkit alongside earning opportunities. Most importantly, popularity is close to stardom.
• For businesses and brands, TikTok offers audiences often with analytical tools.

In the TikTok revenue model section, you saw that 2020 was the year that boosted TikTok’s earnings. The catalyst was the audience. 

One cannot describe the value proposition of a social platform without the voice of the user. Here is a quote from an article by a BBC journalist who describes TikTok’s cultural and social phenomenon:

“Encountering somebody online that you relate to before following them religiously, DM-ing them and inundating them with supportive comments and queries whenever they post is distinctly Zoomer (Gen Z) culture. Asking questions, supporting worthy initiatives and mass-protesting in an app space is something that comes naturally to these digital natives.”

By Sophia Smith Galer

“Having a substantial following on TikTok translates to a strange sort of celebrity in 2020; I only have 140,000 followers, which is pretty small in the grand scheme of the internet, yet I now can’t go a fortnight without being recognised in the street.”

By Sophia Smith Galer

Customer relationships

• Relationship management is community-oriented. TikTok launches community challenges and engages audiences with trends.
•  Its recommendation algorithm allows trends to emerge and allows any individual to create a video with the possibility of going viral. 
• To handle any customer issues or concerns, TikTok has a help center. 

Channels of TikTok business model

TikTok delivers its value through its iOS and Android apps.  In addition, it operates its Douyin app for the Chinese market.

Customer Segments

There are three major customer categories: users, creators, and businesses. Overall, a uniting theme for all users is those who seek entertaining content alongside social interactions and engagement. Users who wish to connect and relate.

Key Activities

In any MLP such as a social media website, user engagement is the key activity. To keep users engaged, TikTok analyzes various metrics. They are things like video completion, likes, comments, views, and others. This data fuels an algorithm that serves content that is highly likely to resonate with each individual user. And the quality of recommendations provided by the algorithm matters. 

Here is another quote from that same 2020 year by the user/creator/journalist:

“ Following on from the era of the YouTube wormhole, TikTok’s algorithm recommends you the content you subconsciously crave – but unlike YouTube, these videos are under a minute long. That means that in one session, you could consume reams and reams of engaging videos – familiarising yourself with creators, trends and communities in the process.”

By Sophia Smith Galer

In addition, TikTok invests in its video editing functionality. After all, novel effects that are easy to use are the cornerstone of creating more quality content by users. 

Additionally, TikTok directs its effort on ensuring a fast and smooth bug-free user experience.

Key Resources

The key resource is its platform with all its underlying infrastructure.

Key Partners

These are content creators and businesses. TikTok has dedicated teams and specialized programs to maintain these partnerships. There are dedicated programs such as TikTok Creator Fund, TikTok Creator Marketplace, and TikTok for Business. TikTok cooperates with its key creators and provides learning materials. There are also account managers for both categories: top creators and top advertisers. TikTok also provides various incentives and holds conferences for creators.

Other Companies that Implement Ad-Based Business Model

Ad-based business models are often a primary choice for a variety of social-based businesses. The quality and interests of the audience determine the kind of advertisers. For instance, Twitter, Facebook, and LinkedIn are all social networking platforms. Yet, the audience engages in each of these for different purposes. Twitter is more about real-time updates, Facebook is for community-centered communication, and LinkedIn focuses on professional networking. Yet, they all embed ads for monetization. Google utilizes an ad-based monetization model heavily, yet it is a search engine used for content discovery. Pinterest is also used for browsing its content library but with a sense of community and focus on inspiration. Lastly, Snapchat is an ad-based business that focuses on multimedia messaging. 

If ad-based business is still not something you want to consider for your startup, check out the article Top 10 Business Models to consider for your startup. There you might find a business model that resonates with you and your business idea.

FAQ: TikTok Business Model & Revenue Model