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TikTok is a sleeping e-commerce giant

Originally posted on quartz.

TikTok is still relatively unproven as a business, and remains challenged by a major geopolitical hurdle. But that hasn’t stopped advertisers from investing heavily in the social platform. Its future has that much potential.

Marketers say TikTok—which still faces a potential ban in the US—presents a massive opportunity for businesses to build awareness for their brands as the app begins introducing a second monetization model: e-commerce. Today, TikTok makes money exclusively through advertising on the platform. But by the first half of 2021, it’s expected to integrate the buying and selling of consumer products into the app experience itself, harnessing the purchasing power of its growing Millennial and Gen Z audience.

“It occupies a space in media that’s unlike any other platform,” said Aaron Goldman, the CMO of Mediaocean, a popular ad sales platform. “There’s opportunity for TikTok to get to Snapchat-like revenues just on the back of a standard advertising offering. But it has a chance to leapfrog Snap and other social networks if it can get past advertising and get to integrated commerce.”

TikTok is expected to generate about $500 million in revenue this year, almost entirely from advertising. Snapchat, by comparison, made $1.7 billion in revenue last year. But TikTok’s user base is growing rapidly: It boasts about 850 million monthly active users (more than twice as many as Snapchat), many of whom are the young people brands desperately want access to. Even Netflix now sees it as a competitor.

“It’s become a habit for a lot of people, and it’ll be hard to break,” Goldman said. “When you have a strong hold on a segment of the population,  you can maintain that.”

Why marketers love TikTok

The allure of TikTok for marketers isn’t just in its future e-commerce potential. It’s already one of the best platforms to reach a mass audience—not unlike what television used to be.

Audiences—particularly younger ones—are increasingly fragmented across media and accustomed to watching content with little to no advertising. TikTok manages to sneak in a relatively robust advertising experience into the app that doesn’t make young users immediately recoil in disgust.

“TikTok ads are a lot easier to resonate with the users,” said Tiffany Ou, the general manager for the Americas of Nativex, a mobile ad platform that helps brands market on TikTok, among other apps. “When they watch them, they don’t even recognize they’re watching ads.”

TikTok ads appear in users’ feeds just like regular TikTok videos, except they’re made by brands, not users. That distinction isn’t always obvious. Many TikTok ads, like this one from the dating app Bumble, will look and feel like every other TikTok video a user sees in their feed. It’s a seamless, unobtrusive experience—and one much different from the ad experience on YouTube, or even Facebook.

And they’re watched by a lot of people. TikTok was the most downloaded app in the world in August, and the average TikTok user spends 476 minutes per month on the app, second only to Facebook among the popular social platforms. And a growing part of its user base, millennials, actually spend more money online than any other age group, even though they have lower incomes on average than consumers 35 and older.

Ou pointed out that though TikTok started catering mostly to Gen Z, its “millennial and older audience” continues to grow as the app goes more mainstream in the US and other countries. She argued it’s important for brands to get users attention now and become a part of their lives before the app adds an integrated commerce model that encourages them to spend on products.

How ads on TikTok work

Brands can negotiate with TikTok directly or use a self-service platform to enter auctions and bid on ad placements. Goldman said that experience is pretty comparable to what you’d find on other social platforms. The CPM (cost per thousand impressions) of ads on TikTok are cheaper the broader your targeted audience is. They get more expensive the more precisely you target specific demographics.

Companies open a TikTok ads account, set up a campaign, and are given a recommended daily budget based on their audience targets. Unlike Facebook, those campaigns need to appear “authentic,” Ou said, using either creative that looks like regular TikTok videos or ads that bring in influencers to market the brand. TikTok features a “Creator Marketplace” in which brands are matched with popular influencers to collaborate on advertisements.

TikTok includes several types of ad types and formats for brands to choose from:

  • In-feed videos: Normal video ads that appear in users’ feeds as they scroll through the app
  • Brand takeovers: Landing page ads that appear and take over the full screen as soon as users open the app. TikTok makes sure users only see no more than one of these per day.
  • Branded AR (augmented reality): TikTok allows brands to create their own custom filters, lenses, and stickers for users to use in their videos
  • TopView ads: Full-screen ads that appear as the first thing users see in their feeds (after they’ve opened the app and potentially viewed a brand takeover)
  • Branded hashtag challenges: Brands sponsor a hashtag that encourages users to add to their videos
  • Sponsored content: Ads can get influencers to make a sponsored video on their own feeds for their followers to see
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But what about TikTok’s ROI?

Though TikTok gives marketers a way to reach young consumers with a seamless ad experience, the app’s return on investment (ROI) potential is still unproven, marketers said. For some, reaching those audiences are their only goal, and therefore the ROI isn’t as important. But brands looking to see precisely measured returns on their investments, in terms of sales or some other metric, may not get that from TikTok.

“That’s where they’re going to need to continue to invest, and do more to show that on a dollar-in, dollar-out basis, it’s driving sales,” Goldman said.

TikTok ranked below Facebook, Instagram, YouTube, Pinterest, and Twitter in ROI, based on a survey of over 30 c-suite advertising executives that work with TikTok, according to the research platform Vancery. TikTok did, however, rank above Snapchat in ROI.

Goldman said that’s mainly due to “structural challenges.” Unlike Amazon, where consumers go specifically to buy things, or Google, where users go to search for answers to questions they have, no one goes to TikTok to shop (yet). “They go to entertain or be entertained,” Goldman said. That could change once TikTok becomes known more for its commerce integration, but right now, users don’t use the app expecting to pull out their wallets, which affects its ROI appeal.

And aren’t there concerns over brand safety?

In that same Vancery survey, TikTok ranked dead last in brand safety—the ability of a company to protect its reputation based on the content it’s surrounded by. The app, of course, is embroiled in a geopolitical controversy as US president Donald Trump has tried banning its use within the US. The courts have temporarily prevented that from happening, but pending the results of the 2020 US presidential election, the app’s future in the country remains up in the air.

On top of that, TikTok has been forced to combat waves of misinformation, election interference, and other dangerous ideologies in videos that appear on users’ feeds. Users also have reported numerous scams, usually involving fake companies trying to get them to share information or pay money for something that doesn’t exist.

Brands that want to advertise on TikTok need to know it’s possible their ads could appear alongside all of that hazardous content. But some think the risk might be overblown. Goldman, for instance, noted that all content on TikTok is ephemeral.

“The concerns are present, but they’re fleeting, the same way the content is present but fleeting,” Goldman said. “Brand safety is only an issue if you get caught.” Because TikTok videos are integrated into an ever-changing feed users scroll through, it’s harder to ascribe any malicious intent to an advertiser that might incidentally appear next to a nefarious video. Marketers certainly monitor for it, but Goldman argued it’s less a concern for them than it is on Facebook or YouTube, simply due to how the platform is set up.

What businesses are succeeding on TikTok?

Ou said direct-to-consumer brands selling products under $200 are doing really well on the platform. On the flip side, companies that sell luxury items—or products with long sell cycles, like furniture, which require re-targeting custom audiences several times over—have struggled. Products under $200 are seeing better conversion rates on TikTok than even Facebook or Instagram, proving the app’s young user base is willing and able to buy things

Goldman pointed to Elf Cosmetics as one brand that’s done well both with paid video ads and also campaigns that have flourished organically. The company’s “Eyes Lips Face” challenge when viral last year: Videos with the #eyeslipsface hashtag were viewer more than 1.2 billion times.

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Perhaps not surprisingly, apps are also doing well advertising on TikTok. “It’s an easy ask of the consumer,” Goldman said. “You clearly have a phone and like apps, here’s another one for you, just click to install.”

One such app is Grammarly, a writing assistant that worked with Nativex on its TikTok campaigns. At first, it made a highly polished, studio-produced video ad, but that didn’t perform well, Ou said. So it then turned to TikTok’s creators, hiring an influencer to market the app to her hundreds of thousands of followers.

“A video shot in an influencer’s bathroom works way better than a polished brand video,” Ou said.

The future of TikTok

Both Goldman and Ou said marketers at smaller firms aren’t too worried about the potential US ban, since they can pivot their resources to other platforms easily. “The app is still available now and billions of people are using it, so it’s a place where you want to be,” Goldman said. “There’s plenty of places to move those budgets [if the app is successfully banned].”

Marketers are excited by Walmart’s potential investment in TikTok in the US because of the retail giant’s e-commerce assets and infrastructure. As one of the world’s leading e-commerce companies, Walmart would presumably know how to help TikTok build an e-commerce platform of its own and turn it into a sustainable business model. That could be exactly what the app needs to go to the next level—from a popular app with a thriving advertising business, to a popular app with a thriving advertising business on top of one of the world’s prevailing e-commerce operations.

“TikTok is here to stay as a stalwart of new media,” Goldman said. The looming ban represents a real risk, but if it isn’t enforced, there’s little in the way of preventing TikTok from being the next vessel with which brands profit.

Source: quartz

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