Reddit’s missing business model: Embedding commerce in culture
A deep dive into the monetization challenges of Reddit and the road to profitability it can take by embracing creators.
Nathan here! If you’re interested in the business of Reddit—how it’s doing (ok), how it compares to peer companies (not great), and what they can do to fix it (embrace creators)—then you’re going to love this article. It was written by Rohit Kaul, a marketing strategist / avid Reddit user, and I had a ton of fun working on it with him. Enjoy!
If I was a stock analyst and Reddit was a publicly traded firm, it would be challenging to assign a rating to it. Their last private valuation was $10 billion, which I am fairly certain undervalues the business’s massive potential. So, it should be a “buy” rating, right? Maybe.
There’s just one problem: Reddit’s current monetization strategy (ads!) prevents it from unlocking the actual value of its 52 million daily active users. In order for me to issue my hypothetical “buy” rating, Reddit would need to recognize that it cannot follow the same path to power as Facebook and Twitter as their advertising business is clearly suboptimal. Instead, Reddit needs to enable its communities and creators to monetize their content by embedding commerce in its platform. Businesses like Discord, Twitch, and Roblox are great case studies that prove this model works, but Reddit has unique communities, scale, and place in culture that make it indispensable.
Reddit is going through an inflection phase right now. Their decisions over the next few years will determine the long-term profitability of the business and its place in the ecosystem of digital platforms. Let’s break down what’s at stake.
The new Reddit
In less than two years, Reddit’s valuation tripled from $3 billion in 2019 to $10 billion in August 2021. It has done two rounds of fundraising in 2021: one in February, which valued it at $6 billion, and one in August that valued it at $10 billion.
The recent growth in valuation is driven by rapid growth in revenue. Reddit has doubled down on digital ads under CEO Steve Huffman, and more than doubled revenue from $76.9 million in 2018 to $181 million in 2020. It is expected that its revenue will cross $350 million in 2021. The revenue growth represents a YoY increase of 93%, which is staggering.
Equally importantly, Reddit is working on repositioning itself as a mainstream social media website with something to offer to everyone (like Twitter). Its latest ad campaign on the theme of “Maybe together we’ll...” shows Reddit as a place for fun things such as gardening, cooking, and running. Reddit’s efforts to broad-base its audience do not stop at advertising. Recently it undertook an extensive subreddit cleansing by removing ~2,000 subreddits, based on its policy update on hate speech.
One could argue that the rapid revenue growth indicates that 16 years after launch, Reddit is finally on the right growth trajectory. But I believe that it can do much better.
Undervalued and under-monetized
As I mentioned earlier, even at a $10 billion valuation, Reddit is undervalued. To understand why, we’ll compare it with Twitter and Roblox. But first, let’s give a quick overview of each of Reddit’s three revenue streams:
- Ads: Ads are the primary revenue drivers for Reddit. It offers various ad inventories such as promoted posts, promoted videos, takeovers, and more. These are nothing different from what other platforms provide.
- Premium membership: Reddit offers premium memberships that cost $5.99 per month. The Premium subscription hides all advertisements on the site and gives access to an exclusive subreddit called r/lounge. It also gives users 700 “Coins” per month, which can be gifted to other users as a reward for posting comments a user likes. A quick look at SEMrush shows that r/lounge’s monthly unique visitors hover around 15,000 to 17,000, which is tiny compared to Reddit’s MAU, and means that its contribution to Reddit’s revenue is miniscule.
- Reddit Coins: Users can also buy Reddit coins and use these to award users who made a good post or comment—“gilding,” in Reddit parlance. These come in various varieties, such as a Silver Award (worth $0.4), Gold Award (worth $1.99), or a Platinum Award (worth $5.99).
So if advertising is their main business, how well is it performing? To give us some perspective we will compare it with Twitter and Roblox.