The Secret to TikTok’s Success With In-App Purchases

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We all know that TikTok makes an enormous amount of money. Its ad revenue increased from $3 billion in 2021 to over $11 billion last year at a time when its competitors struggled to seduce advertisers. This year, it looks like TikTok is dominating another revenue stream: in-app purchases (IAP). According to Apptopia, TikTok has made $205 million more than Facebook, Twitter and Instagram combined.

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Apptopia didn’t say exactly how much money TikTok earned from IAP so far this year. But the number has consistently grown each quarter and reached $350 million in Q4 of last year—up from $150 million in Q4 of 2020.

TikTok’s IAP are mostly coins that users can buy to tip creators during streams on TikTok Live. The starting price is 99 cents for 65 coins, and the largest offering is $249.99 for 165,000 coins. Viewers spend these coins on gifts, which render as short animations that appear onscreen during a livestream. Many cost just a few coins, like the rose and heart animations. But some, like an animated dragon, go for 269,999 coins.

TikTok Live is notoriously a weird space. But plenty of streamers have figured out how to pressure viewers for money. One “sleepfluencer”—someone who sleeps during a livestream—wakes up whenever someone sends him a gift, which encourages viewers to send him things and create a more engaging stream. He earned $34,000 in one month.

So how is TikTok making money off IAP?

To that end, TikTok has been vague. In October, families in Syrian refugee camps used livestreams to ask for donations, some of which were sent as TikTok Live gifts. A BBC report found, however, that TikTok pocketed about 69% of the funds. One person was sent $106 worth of TikTok gifts but only received $33. In response, TikTok refused to clarify how much it earns from each gift but said it was less than 70%.

Other platforms haven’t quite figured out a comparable system. Most have turned to subscriptions and charging users to access certain features. Everyone is probably familiar with the catastrophe that was the Twitter Blue rollout last year. The feature costs $8 per month, and it only has 180,000 American subscribers. While some estimate that the program will bring in over $27,000 million this year, so far Twitter has made almost $900,000 from its IAP.

Meanwhile, Mark Zuckerberg recently announced “Meta Verified” badge that will cost either $12 or $15 per month depending on if the user is subscribing from the web or the app. In theory, this could boost Meta’s annual revenue from IAP. But, the report didn’t include what Facebook has made so far this year, instead only noting that Instagram has earned almost $1 million.

There is, however, a catch: Google and Apple earn anywhere from 15% to 30% of these purchases. This applies to TikTok gifts as well, since the app stores can take a cut from any IAP. Though platforms can direct users to complete their purchases on the web instead of from the app, as seen by Meta’s discounted price for web subscriptions.

That said, TikTok’s IAP is tied to a different mechanism altogether: the relationship between creators and users. Most users aren’t aware that the entire sum of their gift doesn’t go to the creator. A facade that’s further bolstered by the fact that creators often take time to specifically thank people who send gifts or encourage them to share coins.

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In that way, TikTok, like YouTube, has managed to integrate these features into its larger creator ecosystem. And with platforms like Twitter and Instagram struggling to maintain their user bases, TikTok’s IAP success is likely to continue its reign.