How do social networking sites make money?

Have you ever wondered how social media companies make money? Facebook, X (formerly Twitter) and Reddit all allow you to sign up and use the site for free – which millions of users have done. So how do these platforms generate income and remain profitable?

1 Advertising

Social networks make the most money through advertising. There’s a reason sites are designed to be addictive. The more you watch, the more ads you are exposed to.

You can see it everywhere you go. Promoted posts on Reddit’s front page, videos on Instagram Stories, sponsored tweets on X’s timeline, and so on.

Consider that Facebook alone has 2.9 billion monthly active users. That’s a lot of eyeballs ready to be exposed to the latest goods and services that companies want you to buy. Although you can change your preferences for Facebook ads, you cannot receive ads at all unless you live in the EU and pay for a specific subscription.

Social media platforms charge companies money to advertise on their sites. The exact price depends on many factors. For example, companies can pay more to have their ad seen by more people or to be promoted for a longer period of time.

Advertising is a fine line. If social media companies flood their sites with too many ads, users will be turned off or use ad blockers. Just the right amount, and users are more likely to see things they’re interested in, click through, and eventually make a purchase.

2 Licensing of User Data

Another big source of revenue for social media platforms, and a controversial one at that, is the collection and sale of user data.

It is important to understand what this means. Facebook, X, Instagram and the like do not sell identifiable information such as your phone number, email address or other private information to companies.

Data licensing has become even more important as AI companies look to massive data sets to train their models. Reddit has signed more than $200 million worth of data licensing deals with AI companies, according to TechCrunch. Monetizing this data allows platforms to turn user-generated content — which they collect at little or no cost — into a profitable resource.

3 Premium subscription

All popular social media sites allow you to create an account for free. However, some of them will lock additional features behind a paywall in the hope that you will pay for these premium memberships.

One example is the Reddit Premium subscription, which gives you an ad-free experience, access to an exclusive subreddit, a profile badge, and more. Another example is LinkedIn Premium. This provides access to LinkedIn tutorials, better visibility into who is viewing your profile, the ability to InMail recruiters, and more.

Most users won’t pay for these premium memberships, which is one of the reasons the basic account is free. However, for those people who are willing to pay, it represents a good source of income for social networks.

4 In-app purchases

In-app purchases bring another layer of revenue for social media platforms, especially those that focus on entertainment or creative content. Apps like TikTok, Instagram, and Snapchat allow users to purchase virtual items or special effects to enhance their posts, interact with their favorite creators, or even gain visibility.

Take TikTok for example. Users can purchase “coins” which they can then use to buy virtual gifts for their favorite creators during live streams. Instagram similarly offers badges that users can purchase during live sessions as a way to support creators they enjoy. This model gives fans a direct way to support creators and enjoy more interactive experiences.

5 Virtual gifts and tips

Virtual gifts and tips focus on creators making in-app purchases, allowing creators to earn directly from their fans. While users buy coins or tokens to send digital gifts, creators receive these gifts as tips that they can later turn into cash.

Platforms like TikTok and YouTube have made tipping easy, offering options such as virtual gifts during live streams or “Superchats” that allow fans to pay to have their messages highlighted. Social media companies profit by taking a percentage of each tip transaction – usually around 20-30% – while creators gain a new source of revenue directly from their audience’s support.

6 E-commerce integration

E-commerce integrations are another source of revenue for social media platforms. Platforms like TikTok, Instagram and Pinterest offer seamless shopping where users can browse, save and buy products without leaving the app. This “social shopping” strategy allows brands to tag products directly in posts, stories and videos, so users can view product details, see prices and buy with just a few taps.

These integrations are especially valuable for brands looking to reach engaged audiences in a native, low-friction way. Social media platforms often charge brands a fee for these shoppable posts or take a small percentage of each sale.

7 API access fees

Many of the convenient tools and apps we use alongside social media rely on something called API access – basically permission to connect to the main social platform. That scheduling app that posts your content to different networks, a tool that tracks all your social media messages in one place, or those photo editing apps that connect directly to Instagram? They all exist because their creators have access to the API. However, some platforms charge a fee for this access.

For example, Reddit made waves in 2023 when it raised its API fees, resulting in the death of many Reddit clients. API access fees allow platforms to monetize their infrastructure while controlling how their data and functionality are used by external applications.

8 Venture capital

Venture capital is a form of private funding, and many social media companies start out that way. Venture capital is when an investor, such as a wealthy individual or an investment bank, believes that a start-up business has potential.

They then invest money (or sometimes their time and expertise), usually in exchange for a stake in the business. The larger their stake in the company, the greater influence they have on its decision-making. Investors hope to make their money back and more when the business is bigger and profitable.

It is said that “if something is free, you are a product”. This is especially true in the case of social networks. This isn’t necessarily a bad thing, but it’s good to be aware of. While it’s tempting to be wary of certain monetization methods, the truth is: social media platforms need to make money to stay alive.