We often mince about on this platform, asking ourselves or others several questions: How do social media companies make their money? Companies such as Facebook, X(formerly Twitter), and Reddit enable users to sign up and use the website for free, and millions of users have taken advantage of this opportunity. But how do these platforms make money and remain financially sustainable?
Advertising
The largest revenue stream found in social networks today is through advertising. That is why the sites are built specifically to maximize the amount of time users spend there. The more you look, the more adverts you see at the end of the day.
It is visible every time you get to your next destination. It is organically present on the first page of Reddit, videos inserted on Instagram’s stories, sponsored posts on X’s Twitter, etc.
Remember that Facebook currently has ONLY 2.9 billion active monthly users. Many brains await to be awakened and marketed to the newest goods and services firms wish to sell us. You can always modify your Facebook ad preferences, but you cannot opt out of ads unless you are in the EU and are willing to pay £5 to subscribe to specific content.
Social sites have created some space, and they continue to demand money from companies so that their advertisements are posted on their sites. The exact cost depends on quite a few specific considerations. For instance, organizations can bid to show their advertisement to more people or for a certain duration of time to have it seen first.
Advertising is a very delicate balance. If social media companies place too many adverts on their sites, the users will be put off or use ad-blockers. That way, the number of such ads is optimal, and users are likelier to see what they are interested in, follow the links, and eventually buy.
User Data Licensing
Monetizing user data is the second largest source of revenue for social media and perhaps one of the most sensitive means.
You need to know what this entails. Facebook, X, Instagram, and others do not sell your phone number, email address, or other relevant information to interested companies.
Data licensing has come into the limelight even more than before, especially when AI companies are looking for huge data to train their models. TechCrunch reported that various AI companies were involved in trading data-inked deals with Reddit that collectively were valued at over $200 million. Trading this information helps retain and monetize user-generated content that, in most cases, these platforms obtain at a low or no fee.
Premium Subscriptions
Every one of the gossipy tidbits about social media services permits you to make the record complimentary. Still, some of them make extra options paid for the same belief that you will subscribe to these special services.
For instance, Reddit’s Premium subscription removes ads from a user’s feed, provides users with a Premium account to use to gain access to the premium subreddit, and a profile badge showing you are a premium user, among others. A good example is the LinkedIn Premium subscription which allows users to have access to more features than normal logged-in users. Included in this is access to LinkedIn learning courses, better visibility of who is viewing your profile, the right to send InMail to recruiters, and many others.
This is why the base account is free; most users will not pay for these premium memberships. However, for those willing to pay, it is a nice franchise for the different social networks.
In-App Purchases
In-app purchases are the second stream of revenue for social media, especially those dedicated to entertaining users or sharing creative content. Select platforms, such as TikTok, Instagram, and Snapchat, offer the option to purchase various gifting features or exclusive stickers, effects, or additional shares to further support their favorite content producers or increase the reach of their content.
Take TikTok, for instance. The “coin” can be purchased with an individual’s account, where they can make purchases of “virtual gifts” for certain creators while streaming. Instagram also has badges that can be purchased during live sessions to show appreciation for creators the audience likes. This model directly empowers fans, giving them more ways to support creatives and engage in intimate experiences.
Virtual Gifting and Tipping
Virtual gifts and tipping are very much about the creator aspect of IAPs since they are a way for creators to earn from fans. Users can buy coins or tokens to send digital gifts, and in return, the same gifts go to the creators, who cash them in at their convenience.
Newer platforms like TikTok and YouTube have made tipping quite easy. For example, you can send virtual gifts during a live stream or super chat, and the content creator with a highlighted message is charged more. Social media platforms earn their share by charging a percentage of every TIP generated—a 20-30% commission—while the ‘stars’ receive passive income from their fans.
API Access Fees
Most handy functions and applications that one comes across working in parallel with social media require API permission – or essentially permission to interact with the main social site. That scheduling application that shares your posting across multiple accounts, the application that collects all your posts across the various networks, or those picture-enhancing tools that integrate with Instagram? All of them are present because their authors have API access. However, some platforms, even when open to this access, may require payment for this access.
For instance, in 2023, Reddit increased the API fees, which killed many Reddit clients. API access fees are a form of payment through which such a company can generate revenue from its infrastructure while at the same time exercising control over how its data and features are utilized by third-party applications.
Venture Capital
Venture capital is essentially capital from private investors, and it is how many social media companies start. Venture capital involves an investor, say an individual or an investment bank, who considers that a new business has potential.
They then offer money (or occasionally their time and skills), often requiring an ownership stake within the business. That is because the greater their proportion in the business, the more say they have over it. The idea here that the investors have is that they will get their mastery back and more when the business has grown big and can make profits.
There is a popular adage that “if you don’t pay for it, then you are the product.” That is especially true with social media. It is not evil per se, but it is helpful to know. While it’s tempting to be wary of certain monetization methods, the truth is that social media platforms’ main purpose is to generate revenue to survive.
