Reddit’s Business Model: How does Reddit make money?

Reddit’s Business Model: How does Reddit make money?

About Reddit & how it was founded

Reddit is an online forum where users across the globe can post vivid content, comment, vote, surf through the millions of links, images and text posts. In simple terms, Reddit is a storehouse of knowledge and information provided for the people, by the people. It’s the power of the human community, bundled into one exponential platform.

In 2005, Reddit came into existence by the prime efforts of Steve Huffman and Alexis Ohanian. The story of how it was founded is actually kind of interesting.

Steve & Alexis initially wanted to create a sandwich ordering app, and however unlikely it seems, they eventually ended up making Reddit.

They pitched this idea to Paul Graham, co-founder of Y Combinator. FYI= Y Combinator is a startup accelerator, known for incubating & investing in startups such as Stripe, AirBnB, Dropbox, Instacart and so on. Here’s a list of their top companies.

Getting back to the story, Paul was not interested in the sandwich app, but however, did suggest them to go ahead and create the front page of the internet instead. A little bit of fast-forwarding magic, and that’s how Reddit was founded. You can actually click on fast-forwarding magic to read a great article on how Reddit was created.

In October 2006 the site was acquired by Condé Nast Publications. Then in September 2011, it became an independent subsidiary of Advance Publications (Condé Nast’s parent company). After a year, Reddit became an independent organization, with Advance as its largest shareholder.

 

How Reddit works

As with any human community, Reddit too depends entirely on its online community & users. In fact, the whole framework of Reddit’s business model revolves around its users. There are several topics & interests in to which Reddit is divided, each a community of its own. These subsections are known as subreddits, with each subreddit focusing on only one particular topic of discussion. Every subreddit has its own page, moderators and subscribers. These subreddits generally begin as r/{topic}, for instance:

Sub-Reddits
Sub-Reddits

Redditors (Reddit users) have the privilege to upvote or downvote a post or comment which helps the forum’s algorithm (and users as well) to decide the authenticity of the contents posted. The popularity of a post is decided by the number of votes it receives. The most popular posts are displayed on the general front page of Reddit and respective subreddits. You can award posts too.

Along with the votes, Redditors also get karma (virtual points on Reddit) and gold, silver and platinum coins from other Redditors for the quality of their posts. This strategy in Reddit’s business model encourages Redditors to post authentic and high-quality content and helps to maintain the status of the forum.  

 

What makes Reddit unique?

Here’s why Reddit is a unique community like no other:

Reddit Meet Up Day, 2014
Reddit Meet-Up Day, 2014
  • The “Ask me anything” format of the website’s discussion forum is the prime cause of the popularity of Reddit.
  • Redditors are the group of people who have only their Reddit accounts as a common feature otherwise are complete strangers in the offline world; unlike other social media platforms that rely on individuals connections.
  • Reddit neither asks for email address nor charges its users while registering.
  • Reddit has an interesting scheme of in taking volunteers who are eligible to take up the task of being moderators and manage their communities by enforcing community-specific rules and exercising a certain amount of power.
  • The online community of Redditors get to meet each other in person on Global Reddit Meet-Up Day. (Oh yes, this happens)

 

How does Reddit generate revenue?

With so much emphasis on the quality community & users, here are Reddit’s main sources of revenue that keep it powered-up:

From advertisements: 

Reddit’s model for advertisement is divided into two categories: Managed ad posting and Self-serve ad posting

The Managed-ads provides direct access to Reddit’s sales team, starting at a minimum of $50,000. 

The Self-serve ad rate usually starts from $5 and $0.75 per thousand page-views. It increases with the number of page views and can even reach up to $30,000. It also offers an auction system for the advertisements, paying one cent more than the next highest bidding and starts with the minimum bid of $3.50 CPM.

 

The following points encourage more number of advertisements on Reddit and thus establish a prominent source of revenue in Reddit’s business model.

  • The subreddit feature of Reddit business model enables advertisers to specifically reach out to their target audience. 
  • The ranking system of Reddit allows the advertisers to draw a conclusion on how well their ads are received and thus prompts developments. 
  • Reddit business model is more effective at driving traffic and hence advertising on Reddit draws more traffic than any other social media. 
From premium (gold) membership:

Reddit offers its premium membership at $3.99/month & $29.99/annum. 

The premium members get 700 coins every month which they can use to buy reward awards, Silver (worth $0.4), Gold (worth $1.99), or a Platinum (worth $5.99); and reward deserving Redditors for their posts. 

By offering premium membership for Reddit Gifts users:

Reddit Gifts began in 2009 and is considered the largest Secret Santa program in the world. It’s an online gift exchange program between Redditors (randomly matched by the site algorithm) on a specific day. Though the registration to this event is free, the company offers a premium membership (~$3 per month) for Reddit gift users.

 

Funding History:

Till date, Reddit has raised in total about $550.1 million in funding from various venture capital firms.

  • In 2005 at the most initial stage, Reddit had raised funds up to $100k.
  • In October 2014, Reddit raised $50 million in a funding round which valued the company at $500 million then. 
  • In July 2017, Reddit raised $200 million for a $1.8 billion valuation. 
  • In February 2019, a $300 million funding was acquired which brought the company’s valuation to $3 billion.

 

Reddit’s growth story

As of today, the company has about 430 million-plus average monthly active users and 21 billion average screen views per month on its website. In the past 3 years, the forum has witnessed remarkable growth in the market.

  • By 2017, the company had 542 million monthly visitors, out of which 250 million are unique users and an average of 50,000 active communities.
  • By 2018, the approximate count of Redditors was 330 million. And the total number of subreddits was 1.2 million, out of which about 138,000 are active.
  • In 2019, the number of posts on the forum was 199 million and attributed 1.7 billion comments. The most popular category of 2019 was r/skincareaddiction, which crossed 1 million subscribers in that particular year.
  • By 2019, the number of Redditors reached to about 430 million.
  • In July 2019, Reddit ranked as 5th in U.S. and 13th in the world as the most visited website, according to Alexa Internet. 55% of the site’s user base accounted for the United States, followed by the United Kingdom at 7.4% and Canada at 5.8%.

Reddit & competitors

Reddit faces a long list of competitors, some of which are Digg, Tumblr, Quora, 9GAG, and Gizmodo Media Group; and the toughest one being Facebook and Twitter. 

According to the estimation of CNBC, after the latest round of funding, the average Reddit revenue per user (ARPU) was approximately $0.30; while the ARPU of Twitter and Facebook at that time was $9.48 & $7.37 respectively.

But compared to Quora, Reddit has the upper hand. In 2018, Quora had over 300 Million Unique Visitors every month; whereas Reddit crossed that mark in 2017 itself.

Despite having Facebook and Twitter as its prominent competitor, the huge disparities in their business models and Reddit’s business model give Reddit a massive scope of preference by users. The most interesting feature of this model is the level of anonymity that the users get to maintain throughout the business.  In most social media the users gain fame on their names (who they are in the real world). But Redditors get to be known by their posts alone; their name remains a mystery for its only the username that can be seen by the forum. 

The lack of anonymity on other popular social media is the cause of almost all the fake stuff on the internet as people tend to blindly believe the ones they follow. But Redditors are immensely cautious about what circulates on the site and take every step to out rule the unauthentic stuff. Reddit business model has a huge consideration on the quality of its forum and sees to it that its users revolve around the contents rather than the popularity of other users.

Reddit’s business model prioritizes their users’ comfort and hence has taken many measures across the years to establish and update its own personified websites, mobile applications and various required software. In addition to maintaining its stand in the tough market, Reddit’s business model has much philanthropy to its account. The community service from this promising organization indeed deserves genuine praise.

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