How Reddit Makes Money

Reddit makes money by selling advertising space and premium membership

Last Updated July 23rd 2021
7 Min Read

Most of us use one social media platform or the other. Odds are high that we use more than one and often find them the ideal tool to communicate with the world.

Although there is no dearth of social media platforms these days, Reddit Inc. is one of the popular social media websites of the present times. Reddit users form online communities to share ideas, photos, videos, post the latest trends, breaking news, and vote on the content posted by other users on the platform.

A popular social media forum, Reddit is famous for its discussion forums, such as the popular "Ask Me Anything" format.

Reddit is free to use as it does not need you to pay a membership fee for signing up. So, the question often asked is how does Reddit make money? How can it offer the services free without charging the users? In simple terms, the answer is - by selling advertising space and from a voluntary premium membership plan that allows users to enjoy ad-free services and other benefits.

Reddit also provides managed-ad campaigns and auction-based advertising to advertisers.

Key Points

  • Reddit is a social media website that is popular for the discussion forums on various topics such as politics, sports, technology, travel, entertainment, and others
  • The company earns its revenue through advertising and an ad-free premium membership plan
  • Reddit manages application software that allows users to share media content

Reddit In The Social Media Sector

As mentioned above, Reddit is a social media website offering its users a network of communities where the members can post news stories, images, videos, and links. The users are ranked within their specific communities through the content they share which is often evaluated by other users.

Reddit also is popular for its online discussion forums on politics, entertainment, and other such topics. The platform has a long list of competitors, including other popular social media platforms like Facebook and Twitter. It also faces competition from other lesser-known social media companies such as Digg, Tumblr, Quora, 9GAG, and Gizmodo Media Group, to name a few.

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Fundraising and Financials

In the latest round of funding in February 2021, Reddit was valued at $6 billion. The company raised a further $250 million in the latest round led by Vy Capital. In the previous funding in February 2019, Reddit was valued at $3 billion after it raised $300 million. This included investments from various sources and has raised about $800 million in total funding until now.

Reddit has over 52 million active daily users and over 50 billion average screen views per month on its website. The total ad revenue Reddit generated was over $100 million in 2019. According to Reddit’s chief operating officer (COO) Jen Wong, the corresponding figure for 2020 is expected to rise over 70%.

According to CNBC, following the company’s funding in February 2019, Reddit is estimated to pull an in an average revenue per user (ARPU) of approximately $0.30. This was far less than Twitter's ARPU of $9.48 and Facebook's $7.37 during that period.

History & Leadership

Steve Huffman and Alexis Ohanian started the company in 2005. They were college roommates and founded Reddit soon after graduating from the University of Virginia.

In 2006 Condé Nast Publications acquired Reddit. Subsequently, it was spun off into an independent company in 2011. Huffman is Reddit's CEO at present and also serves as one of the company's board members. Ohanian had stepped down as a board member in June 2020 and had expressed the wish that his replacement should be a Black candidate. Subsequently, Y Combinator CEO Michael Seibel was named as Ohanian's replacement.

Latest Developments

Reddit announced the appointment of Drew Vollero as the company's first chief financial officer (CFO) on March 5, 2021. Vollero brings with him more than 30 years of experience in leading finance functions to position them for growth. His most recent stint was as the CFO at Allied Universal. Earlier, he also served as Snap Inc.'s (SNAP) first CFO.

Vollero’s appointment comes at a time when Reddit is exploring the possibility of going public. Reddit’s CEO Steve Huffman had hinted that the company is in the initial stages of exploring an initial public offering (IPO). However, the timing and other details of the IPO are yet to be determined.

Recently, on December 13, 2020, to be precise, Reddit announced that it had acquired the short-form video social platform Dubsmash. It offers a free app for creating and sharing user-generated videos. Although the news of the acquisition was shared with the public, the financial terms of the deal were not disclosed.

How Does Reddit Make Money?

As mentioned elsewhere, Reddit currently generates revenue in two different ways – through premium membership plans and by selling advertising space. Let’s consider this:

Membership Plans

One of the ways Reddit generates income is through its membership plan, Reddit Premium. This plan is available for $5.99 per month. Members get an ad-free experience when they join. They also get some special rewards and access to perks like exclusive subreddits, features like highlighting comments, and personalised ‘snoovatar’.

Premium members also get the chance to test new Reddit features before regular members. Reddit’s premium members get a monthly supply of 700 coins. Redditors award high-quality posts or content with these coins. Regular Redditors must purchase these coins.

Advertising

When it comes to advertising revenue, Reddit has two types of strategies – managed ad campaigns and auctions. Managed ad campaigns start at a rate of $50,000. This package gives advertisers full access to Reddit’s sales team.

The auction, as the name suggests, uses a bid-based system. In this, the advertisers bid on a CPM (click per thousand) basis. It is measured as per 1,000 advertisement impressions or page views a particular webpage receives. Reddit has a minimum bid of $3.50 per CPM. This figure can go up during an auction depending on the demand.

Regardless of which strategy they use, Reddit has proved to be a successful advertising platform for many businesses. Reddit users are protective of their privacy and so they are suspicious of advertising. Nevertheless, they are very responsive to ads that encourage thought, learning, or conversation.

This means that the advertisers have a greater potential to reach millions of Reddit users if they get their ads right. Reddit is a great option for those who need to use affiliate links. This is proved by the fact that new movies and product releases have seen successful advertising on Reddit. The same holds for political campaigns as well.

Is Reddit Profitable?

There is no conclusive evidence to say whether Reddit is a profitable company or not. Going by the recent growth and success with investors, one can only assume that the company is doing well. It is not clear whether Reddit is a highly profitable business. But, the fact that it is attracting investors and advertisers alike, seems to suggest that Reddit is making money and is likely to make money into the future.

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