TikTok undercuts social media rivals with cheap ads in battle for growth

TikTok is offering cheaper advertising rates than rival social media platforms as the fast-growing video app moves to grab a larger share of the digital ads market amid a slowdown in online spending.

Advertisers, industry bodies and brands have told the Financial Times an increasing amount of ad spend has moved from platforms such as Twitter and Meta, which owns Facebook and Instagram, over to TikTok owing to lower costs and better levels of engagement.

TikTok, owned by China’s ByteDance, has shaken up the social media industry in recent years as it has rapidly grown to more than 1bn users worldwide. The short-form video app, which first launched ads in 2019, has also been undercutting rivals at a time when marketing budgets are narrowing.

Figures shared by New York-based media agency VaynerMedia from 2022 show that the cost to obtain 1,000 impressions from video advertising on TikTok is almost half the price of Instagram Reels, a third cheaper than Twitter and 62 per cent cheaper than advertising on Snapchat.

Advertising soared on TikTok in the fourth quarter of last year. The top 1,000 advertisers in the US increased their spending on the viral video platform by 66 per cent to $467mn from September to October of 2022, according to data from Pathmatics, a market intelligence company.

“So many of our brand partners . . . used to be 100 per cent Instagram,” said Permele Doyle, founder and president of creative agency Billion Dollar Boy. “Now for 2023, we’re seeing 80 or 100 per cent TikTok.”

TikTok quickly emerged as a place to engage new, younger consumers, causing rivals to launch their own short-form video offerings such as Instagram’s Reels and YouTube’s Shorts.

However, the Chinese-owned group has drawn attention from global regulators over security concerns. Chief executive Shou Zi Chew will meet EU competition chief Margrethe Vestager on Tuesday, which is expected to include discussions on compliance with the bloc’s landmark new tech regulation.

Tech giants have been hit by a global downturn in online spending in 2022, with Meta and Snap seeing a significant slowdown in revenue growth, leading to widespread job cuts at both companies.

TikTok has not been immune. The FT revealed in November that the group slashed worldwide revenue targets for 2022 by 20 per cent due to the turbulent ad environment. However, the company still estimated it made more than $10bn in revenue in 2022.

“There was this kind of gold rush component to [advertising on TikTok] . . . based on the ability to acquire new users, it’s been a meteoric rise,” said Eitan Reshef, chief executive of digital marketing agency Blue Wheel Media.

The standard engagement rate, where users clicked on, watched or interacted with ad content, for brands on Instagram was 0.6 per cent, whereas TikTok could be as high as 6 per cent, he added.

Advertisers can pay to promote their own videos on TikTok, buy advertising slots which display between user videos, pay influencers to make advertising content on their behalf or create a “branded hashtag challenge” to encourage users to create content around their brand.

Last year, a study by Creatopy, an ad design platform, found that the same video advertised across different platforms won almost three times more impressions on TikTok than on Instagram Reels and YouTube Shorts, both short-form video features. However, the latter had higher levels of user engagement with the content.

“There is a big opportunity for brands to create incredible advertising on TikTok, whatever the budget,” said Kris Boger, general manager of global business solutions at TikTok.

Despite TikTok’s fast growth, the platform had less than a 2 per cent share of the worldwide digital ads market in 2022, compared with 20 per cent for Instagram’s parent Meta, according to Insider Intelligence.

The digital ads market is worth $514bn globally, of which digital video makes up $65bn, according to data from Magna, a media intelligence company, which predicts that video will grow faster than advertising on search and social this year.

Some brands and advertisers have expressed caution over their presence on TikTok because of concerns that some creators do not disclose whether videos are paid partnerships, which is against UK regulation.

They are also concerned about what content their adverts might appear next to, such as potentially harmful content. A person familiar with the partnerships at TikTok said that “luxury brands have been put off” by some shops selling counterfeit products through TikTok’s marketplace.

TikTok said selling counterfeit goods on its ecommerce feature Shop platform was against its policies. Users must disclose branded content and comply with community guidelines on misleading or harmful content, as well as deceptive behaviour, it added.

Billion Dollar Boy’s Doyle said that Instagram was still the leader in advertising for luxury brands, as it had a proven effectiveness, especially among a target audience of higher wealth, female consumers between the ages of 20 and 40.

But she said that all “the luxury brands are trying to figure out now how to be more present on TikTok”. She added: “I think they see that there are audiences they need to build while also still focusing on Instagram.”

Some advertising experts also noted that TikTok’s ad capabilities did not fully match its larger and older rivals due to the amount of data insights competitors such as Google, which owns YouTube, and Meta supply to advertisers.

TikTok’s rapid growth has spurred rival platforms to fight back.

YouTube is testing new commission schemes for influencers who sell products through links in Shorts videos as it battles to hold on to its content creators — users who make content on YouTube — against fierce competition from rivals. This will see it pay creators 45 per cent of the revenues they make from ads, a similar model to TikTok which offers a 50 per cent split. YouTube, said its Shorts platform had already reached 1.5bn monthly users.

Benjamin Allison of VaynerMedia, who works directly with TikTok, said the platform’s Achilles heel was the data it offered to advertisers.

“Meta and Google are in a league of their own in terms of data stack advertising [offering tools to process raw data], years ahead of TikTok,” he said. “TikTok’s way of showing that their ads work is anecdotal compared to the sophistication of their rivals.”