How TikTok makes money: Turning viral videos into a shopping empire

TikTok not only shapes what we watch, but it has also transformed how we discover music, shop, and how brands advertise. All of this happens on a platform that remains free to use and cleverly weaves itself into nearly every corner of modern life. Its advanced algorithm knows what you want before you do, turning that attention into a fast-growing, multi-billion-dollar business.

In this article, we’ll explore how TikTok makes money, including its strong advertisement business, its booming live-stream gifting economy, and its explosive push into e-commerce with TikTok Shop. We’ll also look at how ByteDance turned a viral video app into one of the internet’s most sophisticated monetization engines.

With over 1.6 billion monthly users and $23 billion in 2024 revenue, TikTok stands as a major cultural influencer and monetization leader. It is on track for $33 billion in expected revenue by 2025, making it an important case study in converting attention into money.

Table of Contents

• How TikTok works

• TikTok’s revenue streams

  • Advertising

  • In-app purchases (TikTok coins & virtual gifts)

  • E-commerce (TikTok shop & affiliate commerce)

  • Creator services and licensing

• TikTok’s operational costs

  • Infrastructure and R&D

  • Customer acquisition and payment processing

  • Staffing and overhead

  • Marketing and growth spend

  • One-off or sunk costs

• TikTok’s competitors

  • YouTube Shorts 

  • Instagram Reels 

  • Snapchat Spotlight

• The future of TikTok

How TikTok works

TikTok is a short-form video platform designed for entertainment and discovery. Unlike traditional social networks that rely on connections between friends, TikTok emphasizes content. The feed is curated by algorithms that show you videos you’ll likely enjoy, regardless of who you follow.

The core product is a full-screen, vertically scrolling feed known as the For You Page. This feed provides a rapid-fire stream of personalized videos that autoplay and loop for instant engagement, requiring no previous connections or setup to start watching.

New users can dive right in before needing to sign up. The app starts by showing trending or location-based videos, and then quickly adapts the feed based on subtle user behavior such as how long the users watch each video, what they skip, and whether they hit replay. This easy onboarding is central to TikTok’s rapid growth.

TikTok makes it easy for users to create content with an in-app studio packed with effects, filters, music clips, and editing tools. Features like Duet and Stitch allow users to build on each other’s videos. Viral challenges and hashtag trends keep the community engaged and constantly generating new content.

Behind the scenes, TikTok uses ByteDance’s proprietary AI engine to optimize what each user sees. Essentially, it operates as a platform where creators make the content, users engage with it, and advertisers pay to access that attention. 

The company has developed a range of tools and partnerships, including TikTok for Business and TikTok Shop for turning videos into shopping experiences.

Collaborations with Shopify and Oracle support commerce and data hosting, while music licensing partnerships allow creators to legally use popular songs  — a crucial part of TikTok's appeal.

TikTok’s revenue streams

TikTok’s revenue has grown quickly, reaching $4.8 billion in 2021, $9.6 billion in 2022, and $16.1 billion in 2023. By 2024, revenue reached $23 billion, a 43% year-over-year increase, with projections for 2025 estimating $33 billion.

Advertising is the largest revenue stream, accounting for roughly 75–80% of overall income in 2024. E-commerce, powered by TikTok Shop, contributed about 15%, while in-app purchases through virtual gifting make up another 10%. With a global average revenue per user (ARPU) of $14 in 2024, TikTok still trails behind Instagram and YouTube but is rapidly catching up.

Advertising

TikTok’s advertising business is its biggest revenue generator, bringing in an estimated $18–19 billion in 2024. It offers a variety of ad formats designed to blend seamlessly into the user experience, including in-feed video ads, TopView and Brand Takeovers, Branded Hashtag Challenges, Branded Effects, Spark Ads, and TikTok Pulse, a revenue-sharing program for creators.

User-generated content (UGC) ads perform exceptionally well on TikTok, often driving 55% better ROI than polished branded content. Brands typically pay an average of $10–12 CPM, and categories like tech, beauty, fashion, and music lead ad spending. 

In 2024, TikTok earned an estimated $10.4 billion in the U.S. alone. 

In-app purchases (TikTok coins & virtual gifts)

TikTok also makes money through direct purchases from users, such as TikTok Coins and virtual gifts. Fans buy TikTok Coins with real money and use them to tip creators during live streams. These gifts appear as animations on-screen and creators can convert them into real money.

When a user buys TikTok coins (the currency used for virtual gifts), the Apple App Store or Google Play Store takes a 30% commission on the purchase. After the app store fee, TikTok takes about 50% of the remaining value. The rest goes to the creator when they cash out their earnings. Despite these fees, the costs are low since virtual goods have almost zero marginal cost. 

In 2024, TikTok generated approximately $2.3 billion from in-app purchases, primarily through virtual gifting during live streams. This accounts for about 10% of TikTok’s total revenue of $23 billion for the year. 

E-commerce (TikTok shop & affiliate commerce)

TikTok’s ecommerce efforts are gaining momentum. TikTok Shop generated $33.2 billion in global gross merchandise value (GMV) in 2024, including about $9 billion from the U.S. With an estimated 5–10% take-rate on transactions, TikTok likely earned $1.5–3 billion in commerce revenue.

The platform integrates shopping into content through shoppable short videos, live streams, and affiliate links. It also offers its own logistics service called Fulfilled by TikTok to support sellers. Although profit margins are thinner than advertising, TikTok aims to replicate super-app Douyin’s success in China, where GMV exceeds $200 billion. 

Creator services and licensing

These represent TikTok’s smallest revenue contributors, generating less than 5% of overall revenue. However, they play a strategic role in enriching the ecosystem and keeping users engaged. Offerings include the Creator Marketplace for influencer collaborations, licensing revenue from the Commercial Music Library, and select brand partnerships.

TikTok also licenses its recommendation technology through BytePlus, ByteDance’s B2B technology arm. Looking forward, the company is testing TikTok Music, exploring merchandising and ticketing, and experimenting with media licensing. All of this could provide incremental revenue streams as TikTok expands its footprint beyond short-form video.

TikTok’s operational costs

TikTok’s growth has brought about significant operational challenges. Its largest costs come from the infrastructure needed to deliver billions of daily video views, investments in artificial intelligence (AI), and compliance required to maintain a global platform of this size. Incentives aimed at attracting users and creators incur costs as well. Below is a detailed breakdown of TikTok’s main cost drivers.

Infrastructure and R&D

Running TikTok on a global scale requires substantial investment in infrastructure. This includes data centers and real-time video delivery pipelines, all designed for speed and personalized user experiences. 

Projects like "Project Texas" in the U.S. illustrate this scale: TikTok committed over $1.5 billion upfront and an estimated $700 million annually to ensure American user data is stored domestically.

In Europe, a similar initiative called "Project Clover" aims to localize data through the development of new data centers in European countries. These efforts are driven by regulatory demands but also serve to boost performance and reduce latency. Behind the scenes, TikTok’s AI team works tirelessly to refine its recommendation engine to keep the users engaged.

ByteDance, TikTok’s parent company, spent $14.6 billion on R&D in 2021, and TikTok's share of this has likely increased with its global ambitions. Ongoing investment is vital for enhancing the algorithm and exploring emerging initiatives in augmented reality, music discovery, and in-app search. 

Customer acquisition and payment processing

TikTok’s initial growth was fueled by aggressive paid user acquisition strategies. Between 2018 and 2020, the company reportedly spent hundreds of millions running ads on platforms like YouTube, Instagram, and Snapchat. These efforts were instrumental in building the user base, especially in the U.S. and Europe, allowing TikTok to establish a strong presence outside Asia.

TikTok invest significantly in expanding its commerce capabilities. In 2023 and 2024, TikTok offered substantial subsidies to users and sellers via TikTok Shop, covering costs for things like free shipping, coupons, and cash-back incentives. The total cost of these subsidies is estimated to be in the hundreds of millions. 

Additionally, TikTok pays payment processors that range from 1.5% to 2.9% per transaction, with app stores taking an additional 30% cut on in-app purchases.

Staffing and overhead

Operating a global app with billions of users requires a massive workforce. As of 2023, TikTok employed about 38,578 individuals, with over 11,400 in the U.S. This includes engineers, product managers, sales teams, policy and legal experts, and trust and safety teams.

Salaries can be quite high, particularly for technical roles. For example, engineers at TikTok earn a median annual salary ranging from  $180,000 to $350,000, while product managers average around $389,000. Content moderation is another major line item: TikTok employs or contracts approximately 40,000 moderators worldwide, with U.S.-based moderators earning around $120,000 per year. 

Marketing and growth spend

Even after achieving initial user growth, TikTok continues to invest heavily in brand marketing and engaging with creators. In 2024, the company was estimated to spend $1.25 billion on influencer marketing globally. Its promotional strategies also include TV commercials, high-profile ads during major events like the Super Bowl, and global sponsorships such as the one with UEFA Euro 2020.

To retain creators and encourage new trends, TikTok has launched initiatives like the Creator Fund and the Creativity Program, which have distributed millions of dollars since 2020. The company also has regional teams that work with creators, coordinate trends, and manage local partnerships.

One-off or sunk costs

TikTok faces considerable non-recurring costs related to legal and regulatory issues, as well as challenges stemming from geopolitical issues. In 2023, for instance, Ireland fined TikTok €345 million for violations linked to children’s data, followed by a €530 million penalty in 2024 from the EU over data transfers to China. These fines total more than $950 million.

The company has also ramped up lobbying efforts, spending over $17.7 million between 2019 and 2023 to influence legislation in key markets. 

The ban of TikTok in India, a market that once boasted 200 million users, is estimated to have cost the company $6 billion in potential future revenue. 

Other historical costs, such as the $1 billion acquisition of Musical.ly and ongoing costs tied to potential U.S. divestiture scenarios, also add pressure to TikTok’s financials.

TikTok’s competitors

TikTok operates in a highly competitive short-form video landscape, with nearly every major tech platform launching its own competing product. While TikTok currently leads in user engagement and cultural influence, its rivals are closing the gap. Here’s how TikTok stacks up against its biggest competitors.

YouTube Shorts 

YouTube Shorts serves as Google’s version of short-form video. It’s integrated within the broader YouTube platform and enables users to create, upload, and watch vertical videos that are up to 60 seconds long. Shorts was launched globally in 2021 as a direct response to TikTok’s dominance in mobile-first, short-form video consumption.

One of Shorts’ biggest strengths is its integration with YouTube’s existing ecosystem, which has over 2 billion monthly users. The platform boasts a massive content library and a well-established community of creators. Furthermore, YouTube’s Partner Program offers a compelling 45% ad revenue share for Shorts creators.

However, Shorts operates as a secondary experience within a platform designed for long-form content. Its interface doesn’t feel as natural for short-term viewing, and it often lacks the trend-setting energy of TikTok. Many creators and viewers regard it as a space for recycled TikToks rather than fresh content.

In terms of market share, Shorts captures about 27% of short-form video time in the U.S., compared to TikTok’s 39%. Despite this, Shorts surpassed 70 billion daily views by early 2024.

Instagram Reels 

Instagram Reels is Meta’s short-form video feature within the Instagram app, launched to compete with TikTok. Users can create vertical videos ranging from 15 to 90 seconds, complete with audio, effects, and editing tools. Reels is tightly integrated with Instagram’s core experience and leverages its vast social network for distribution.

One key advantage of Reels’ is its access to Instagram’s 2 billion+ monthly users. It benefits from Meta’s well-established ad infrastructure, influencer marketing tools, and the ability to target users across platforms. Reels is also embedded within an ecosystem that blends short-form content with Stories, Feed posts, and Shopping.

Reels has struggled to create a unique identity. The product is often seen as a clone of TikTok, and users report less enjoyable discoveries through its algorithm. It competes for attention with other Instagram formats, which can dilute its overall engagement.

Reels captures about 20% of short-form video time. But it’s growing quickly: as of 2023, Reels accounted for 40% of all time spent on Instagram, with expectations for further growth as Meta emphasizes AI-driven discovery and cross-posting to Facebook.

Snapchat Spotlight

Spotlight is Snapchat's short-form video feature, focusing on showcasing user-submitted content in a public feed. Unlike other elements of Snapchat, Spotlight emphasizes viral content rather than private messaging and serves as a discovery-first feature.

Spotlight’s biggest strength is its deep engagement with Gen Z and U.S. teens, who make up a large portion of its 900 million monthly active users. It benefits from Snapchat’s advanced augmented reality (AR) capabilities and camera-first design, with content often discovered in more personal, context-rich ways.

However, Spotlight does face challenges. Its international footprint is narrower than TikTok’s or YouTube’s, and its share of public short-form video time is smaller. Users also tend to spend less time on Spotlight than on TikTok or Instagram Reels, partly because Snapchat primarily focuses on messaging.

Spotlight is estimated to account for about 5–10% of global short-form video watch time. Despite being smaller than competitors, it has a highly engaged user base. Snap is working to enhance this with creator incentives and new content tools.

Recent initiatives include the launch of a revenue-sharing program in 2023 and Spotlight Challenges, which reward top-performing videos with cash prizes. The company is also developing AR-native creation tools and AI-powered discovery through its "My AI" assistant.

The future of TikTok

TikTok is making strategic moves to strengthen its position and expand its business model:

• TikTok Shop Expansion: It aims to grow TikTok Shop across the U.S., Europe, and Latin America.

• Creativity Program: This initiative replaces the Creator Fund, rewarding creators for higher-quality content.

• New Verticals: TikTok is testing out new areas like TikTok Music, AI-powered tools, and in-app search features.

Geopolitical issues remain a pressing challenge. The U.S. has set several deadlines for ByteDance to divest or face a potential ban. In Europe, the company faces scrutiny under the Digital Services Act, which has prompted major investments like Project Clover to localize user data. These efforts have increased compliance, legal, and lobbying costs across regions.

TikTok also faces monetization challenges. Despite leading in engagement, its average revenue per user (ARPU) still falls short compared to Instagram and YouTube. There’s growing pressure to improve creator payouts, enhance its advertising model, and increase its market reach. At the same time, TikTok must keep users engaged as the novelty of short-form video matures.

The long-term opportunities for TikTok are significant. The platform is uniquely positioned to merge entertainment, commerce, and the creator economy into one cohesive experience. If it continues to follow the example set by Douyin’s, it could evolve into a super-app that combines video, shopping, search, and services. Additionally, its personalization algorithm is one of the most powerful engagement tools on the internet, providing a core advantage that no competitor has been able to replicate.