How do social media platforms make money?

Have you ever wondered why giant social media platforms like Facebook, Instagram, TikTok, X (formerly Twitter) or Reddit allow millions of users around the world to access and use their platforms completely free of charge?

What makes these companies willing to provide such a valuable service without charging users directly? So how do these platforms generate revenue and stay profitable?

1. Make money from advertising

Advertising is considered the main source of income for social networks. To maximize profits, these platforms take advantage of human psychology, creating experiences that make it difficult for users to leave. The more you scroll, the more likely you are to be sucked into a vortex of personalized ads.

Advertising has become an indispensable part of social media, like uninvited guests. When surfing social media platforms such as Facebook, Instagram, TikTok, ... you will see advertisements. They appear unexpectedly, interrupting the user experience, making it difficult for you to escape the impact of advertising.

For example, with 2.9 billion users, Facebook is a giant "online supermarket" where businesses display their products to billions of potential customers. Every time you open the Facebook app, you are walking into a bustling shopping mall where advertisements are calling you.

No matter how hard you try to get to your target, it’s hard to avoid the tempting offers. And surprisingly, these ads are often incredibly personalized, based on the data Facebook has collected about you.

It must be said that social media platforms are like giant auction houses where businesses compete for users' attention. Advertising costs on these platforms are not fixed but depend on many factors, from the popularity of keywords, ad placement, to campaign duration. For example, a business that wants to advertise a new product during peak season will have to pay higher prices than at other times of the year.

Social media platforms need to find a balance between generating ad revenue and ensuring a seamless user experience. If ads are too frequent, users will feel annoyed and try to block them. Conversely, if ads are too few, businesses will not achieve the desired effect.

2. Make money from collecting and selling user data

In addition to advertising, the collection and sale of user data has become a huge source of revenue for social media platforms. Every interaction, every like, every comment is collected and analyzed to create detailed personal profiles. This data is then sold to companies and organizations so they can target ads more accurately, leading to concerns about privacy and information security.

It is important to note that social media platforms such as Facebook, X (Twitter), Instagram, etc. do not directly sell your personally identifiable information to other companies, including your phone number, email address, or bank account information. However, they do collect and use data about your behavior and interests to build user profiles, thereby providing more personalized services and selling targeted advertising.

Data has become the new “black gold” in the digital age. Artificial intelligence (AI) companies are hunting for data to develop smarter products and services. Social media platforms like Reddit, with their huge amounts of user-generated data, have become attractive targets. Reddit’s signing of more than $200 million in data deals with AI companies shows that user data has become an extremely valuable asset.

3. Make money from premium membership fees

Most social media platforms welcome users with free accounts that provide basic features for connecting and sharing. However, to enjoy a more complete social media experience, many platforms have designed premium membership plans. These plans often come with exclusive, unlimited features that allow users to customize and personalize their experience more than a free account.

Reddit Premium, for example, offers users an ad-free experience, along with access to exclusive subreddits that focus on in-depth topics and lively discussions. Premium members also get special badges that show their status and support for the Reddit community.

Similarly, the LinkedIn Premium package also offers a range of attractive features such as access to a huge knowledge base with professional courses, the ability to analyze in detail the people interested in your profile, and especially the InMail feature that helps you proactively connect with potential employers.

Offering a basic account for free is a smart strategy to attract a large initial user base. However, social media platforms understand that not everyone is satisfied with the basic features. So they create premium membership packages, with attractive incentives to attract a group of users who are willing to pay. This not only increases the revenue of the platforms but also creates a loyal customer segment, willing to spend for a better experience.

4. Make money from users' in-app purchases

In-app purchases have become a significant source of revenue for social media platforms like TikTok, Instagram, and Snapchat. By offering a range of virtual goods, from unique filters and effects to virtual gifts for creators, these platforms not only create a more engaging user experience but also open up a vibrant online shopping market. Owning these virtual items not only allows users to express their personalities, but also provides a way for them to interact and connect with their communities on a deeper level.

Take TikTok, for example, which has created a vibrant community of creators. Users can purchase “coins” and use them to give virtual gifts to their favorite creators during livestreams. Each virtual gift is not only an act of support but also a way to express affection and interact directly with their idols. Similarly, Instagram has also allowed users to buy badges during livestreams, creating a space for close connection between fans and creators.

5. Earn money from virtual gifts and bonuses

Virtual gifts and bounties have created a direct bridge between content creators and fans. By purchasing virtual gifts, fans not only show their support but also motivate creators to continue producing quality content. For creators, these gifts are not only recognition but also a steady source of income.

Platforms like TikTok and YouTube have revolutionized the way fans show support for their favorite creators. Virtual gifting features in livestreams and “Super Chats” have created a space for real-time, direct interaction where fans can send virtual gifts or highlight their comments to show their admiration.

These platforms collect a portion of the revenue from each bounty transaction, typically around 20-30%, to maintain and develop the service. Meanwhile, the majority of the remaining money will be transferred directly to the creators, giving them a stable additional income source from their own fan community.

6. Make money from e-commerce integration

E-commerce integration is another revenue stream for social media platforms. Platforms like TikTok, Instagram, and Pinterest offer seamless shopping experiences where users can browse, save, and purchase products without ever leaving the app. A “social shopping” strategy allows brands to tag products directly in posts, stories, and videos, allowing users to view product details, see prices, and make purchases with just a few taps.

E-commerce integrations are especially valuable for brands looking to reach their target audience organically. Social media platforms typically charge brands for these shoppable posts or take a small percentage of each sale.

7. Monetize Application Programming Interface Access Fees

Application Programming Interfaces (APIs) are the bridge that helps different applications connect and share information, giving us convenient digital experiences. Thanks to APIs, we can easily manage multiple social media accounts, automate tasks and save time. However, to be able to use APIs, developers often have to pay a certain fee to the providing platforms.

In 2023, social media platform Reddit’s decision to increase its API fees sparked a wave of backlash from its user and developer communities. While charging API fees has helped platforms like Reddit generate additional revenue to maintain and grow their services, it has also led to the shutdown of many third-party applications. This highlights the need to find a balance between making a profit and ensuring diversity and utility of services for users.