Have you ever wondered how does WhatsApp earn money?
The concept of sending text messages through a digital platform is a few decades old. The SMS (Short Message Service) delivery system has been in use for less than 30 years.
In 2009, Brian Acton and Jan Koum founded WhatsApp to overcome the deficits of the traditional text messaging systems like SMS and revolutionize the entire field of text messaging.
WhatsApp has more than 1.6 billion users across the world, and most active users of the text messaging service were present in India.
In five years of its operation, WhatsApp Inc. was bought by Facebook for USD 19 billion due to its tremendous growth potential.
WhatsApp is an online platform for sending text, audio, location, video messages and sharing documents. The service is available free of charge to users all around the world.
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Have you ever seen advertisements for WhatsApp?
If you are a newer user of WhatsApp, then the answer to the above questions is no. A small annual fee of $1 was applicable for users of WhatsApp until January 2016.
This article includes details about WhatsApp Inc, the parent company of WhatsApp, rather than WhatsApp, the product, and its features.
In 2014, at the time of its purchase, the valuation of WhatsApp Inc. was USD 1.5 billion, according to many Venture Capital experts.
Its revenues were around USD 1.3 million in 2014 before acquisition by Facebook Inc. How does a service with freeware licensing generate revenue?
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In macroeconomics, two sides are participating in a transaction. The Supply-side, or the seller, sells the products or services to the demand side.
A place where the suppliers and buyers for a particular product or service transact in the market.
Usually, the price of the products or services depends on the amount of demand and the amount available for selling.
The suppliers set prices of their products and services to gain an advantage over their competitors. There is an exception to this scenario.
Suppose a company comes out with a new product or service. The company must estimate the size of the market and the potential to gain more significant shares in the long run for themselves.
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WhatsApp Inc. was a novelty service in 2009. It had a potential 3.3 billion users in the market with access to mobile phones.
The demand for mobile users was increasing. More importantly, their needs for technological innovations were increasing.
Therefore, WhatsApp Inc. decided to launch WhatsApp messenger for a nominal fee to gather a maximum possible amount of users.
How does a company raise the necessary funds to launch the product?
There are several different means of raising money to start a company.
The first round of investment that a company seeks to launch their product or service is the seed funding round.
Seed capital is the money a company acquires from the seed funding round. There are different avenues for acquiring seed capital. The most common way to raise capital is through angel investors.
Suppose you wish to start a company and need money to start operations. The first set of people you will approach for financial aid are the FFF, i.e. friends, family.
This group of people are the angel investors of a business. The angel investors are the most appropriate source of raising funds when private investors and VC (Venture Capitalists) are unwilling to invest in your company.
Individual investors and Venture Capital agencies fall under the category of accredited investors in a seed funding round.
If your product or service is unique and has the potential for growth in the market, private investors or VC companies will be willing to shell out money for investment.
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The third type of investors in the seed funding round are crowdfunding investors.
There are online platforms available for entrepreneurs to raise capital for their products and services.
For example, websites like GoFundMe, Fiver, Kickstarter, etc. allow founders to display their product prototypes and raise money through public donations.
There are many companies present in the market for the sole purpose of investing in promising products and services.
Sequoia Capital, an American Venture capital company, specializes in investing in companies with the potential to grow.
WhatsApp Inc. was able to raise seed capital with the help of angel investors and Venture Capital companies like Sequoia Capital.
The angel investors were five friends of Brian Acton. Brian knew them from his days at Yahoo.
The seed capital from these angel investors was USD 250,000. In the early part of 2011, Sequoia Capital made another USD 8 million available for investment in WhatsApp Inc.
The early signs were promising with plenty of investment available to WhatsApp Inc. However, this was only the beginning of their journey.
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Now that we have seen the early stages of WhatsApp Inc., the next part of this article will look into the business model of the text messenger company.
A business plan describes a company’s financial, economic, cultural and social aspects.
A clear business plan helps customers and investors understand the vision of the company. WhatsApp Inc. was clear in its intention.
Their intention was to revolutionize the field of text messaging on mobile phones. Before the advent of WhatsApp text messenger, it was implausible to combine multiple media platforms on a single application.
In the times before WhatsApp messenger, communication in a non-vocal form as possible by sending SMS (Short Message Service) and MMS (Multi-Media Service).
As the years went by, the rates of sending SMS and MMS messages became cheaper. In 2009, several mobile phone service providers would charge between INR 0.50 to INR 2 per SMS.
There were character limitations on the length of an SMS text message. Users may send an SMS containing more than 160 characters, but the receiver would receive messages in fragments of 160 characters each.
Text messaging is simple to use and useful in situations where talking on the phone is improbable.
The cost and inefficiency of SMS messages was an obstacle in communication. We all had ‘that’ one friend in our social circles who would receive SMS messages but never reply to them and it is hard to blame them because text messaging was expensive in the early 2000s.
The founders of WhatsApp messenger were clear in their minds about the mission of their service.
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WhatsApp Inc. believes they are an alternative to SMS and MMS message delivery systems.
Their mission statement focuses on building faster and reliable message delivery services across the world for free of charge to the users.
The keywords in their mission statement are fast, reliable and free of cost.
The older SMS text messaging system was reliant on the reception of a mobile signal to determine the speed of message delivery.
WhatsApp messenger uses internet connection for delivery of messages between users.
There are no restrictions on the length of the messages being sent. The content of the message can include text, voice, image, video and, location data.
The founders of WhatsApp Inc. were sure about the quality of their product. They knew that WhatsApp messenger would be accessible in a short amount of time.
At the time of entering the seed funding round, WhatsApp messenger had 250,000 active users.
This version of WhatsApp messenger was defective. There were several problems with push notifications.
The mobile application of WhatsApp messenger would shut down from time to time.
Despite these issues with the earlier version, the encouraging signs were seen in their subscriber count.
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A new version: WhatsApp 2.0
It came with a series of new features and improvements.
This version underwent continuous improvements and changes. The results were there for everyone to see.
In 5 years of operations, WhatsApp had more than 500 million users around the world.
The founders had the foresight to see this tremendous rise in the number of users. Therefore, the app was built on a subscription model. The fee was a nominal amount of USD 1 for an annual subscription.
WhatsApp messenger was available for free on a one year trial basis. The users had no hesitation in trying out a service, basically, for free of cost.
The subscription model was a success for WhatsApp Inc. There were more than 700 million users to the WhatsApp messenger service under this model. But WhatsApp Inc. had different ideas for the direction of the company.
WhatsApp’s strategy was quite simple; earning an average USD 1 per user for an entire year would see their revenues soar high every year.
For example, if WhatsApp Inc. had 500 million users by the end of 2013, then their revenue for the financial year 2013 would be around USD 500 million.
The founders of WhatsApp Inc. foresaw the continuous growth in the number of users. Therefore, one dollar per user for an annual subscription was the equilibrium price for buyers and sellers in the text messaging market.
The users were happy to use WhatsApp messenger in place of SMS and MMS messaging services. WhatsApp messenger was better than the traditional SMS messaging in all aspects.
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The growth of WhatsApp messenger was meteoric
Many different companies took notice. WhatsApp Inc. kept receiving funding from Sequoia Capital, but it was time for bigger investments.
Traditionally, the founders of a company aim to grow the number of customers and, explore new markets.
The focus in this growth strategy affects balancing the books in an adverse way. In other words, the financial bottom line of a company is less important than the top line during the period of growth.
There is a simple justification for following this strategy. A newer company relies on external resources. The operations of the company rely on investors’ willingness to keep investing resources into the product or service.
WhatsApp Inc. had a few other sources for generating income. The WhatsApp text messaging app would ask users to buy stickers from the app.
A user could purchase stickers from the WhatsApp app for use in chats. Stickers are drawn versions of the emoticons available in the keyboard. WhatsApp had ads in the application for earning money.
The advertisers saw potential in publishing their ads on a platform which had more than 500 million users.
The visibility of the app in different areas across the world was an essential reason behind advertisers paying WhatsApp Inc. to display their ads.
An investor, potential or existing, look at different metrics before investing in a company. The key performance indicators (KPI) of a new company emphasize the ability of the service or product in acquiring new customers, retain existing customers and gain entry into more unique markets.
The investors focus on these KPIs to ensure long term dividends from the company. It takes a shorter amount of time to stabilize the financial bottom line of the company than improving the top line.
With all these parameters in mind, Facebook Inc. made a decision of acquiring WhatsApp messenger services in February 2014.
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The purchase of WhatsApp Inc. by Facebook has been the biggest one in Facebook’s history.
WhatsApp’s acquisition by Facebook brought about a change in the business model of the text messaging application.
The subscription model was ineffective from January of 2016. WhatsApp was made available for free of cost on all platforms.
The vision of WhatsApp Inc. under Facebook was to become part of a group of Internet services available to users for free of cost.
Now, while reading this last sentence, it must seem befuddling to you that WhatsApp went from charging USD 1 per year to free of charge.
What was the reason behind Facebook making WhatsApp free of charge to use?
It seems counterintuitive to sell a product or service for free.
Especially, a product with the global appeal of WhatsApp. The next section of the article will describe the new
WhatsApp text messenger business model after its integration with Facebook internet services.
New business model:-
There is an old adage in the English language which says there are no free meals in this world.
The adage is traceable to the 1930s and refers to a common phenomenon in today’s world.
If something seems too good to be true, then it probably isn’t real. The adage revolves around a free meal because it is said to have its roots in pubs and bars.
Bars would have a “free lunch” sign to invite customers. The unsuspecting customers would end up paying a large amount of money over drinks.
There are similar things seen in the new business model of WhatsApp under Facebook Inc.
The secret behind WhatsApp’s new business model lies in its new mission statement under Facebook Inc.
Facebook wants WhatsApp messenger to join its group of Internet services:
Facebook Inc. provides services like Facebook (social media platform), Instagram, WhatsApp, and other iterations of these services. These platforms are all available for the users to use for free of charge.
However, Facebook is still one of the biggest companies in the world, earning more than USD 55 billion in revenues. For all these things to make sense, we must know the concept of digital advertising.
Facebook has been around for more than 15 years now. It is a leading social media platform.
They have always been available for registration free of cost. Facebook hosts more than 2 billion users in the world.
In other words, Facebook has a number of users than the population of China, a country with the largest population in the world.
One of the ways Facebook uses for earning money is from digital marketing. In the year 2017, almost 90% of its revenue came from digital ads.
Did you form a connection between the two statements?
If you did not, then the following section of the article will do so for you.
Digital marketing is a form of marketing. It is common knowledge, now, that marketing is an exercise that a company performs to raise awareness about their products and services.
It is a practice that has been going on for decades. Also, it has been evolving over the years. In the ’40s, 50’s, and 60’s, marketing efforts were local.
With the progress made in the field of technology, marketing has grown to global scales.
It has never been easier for a marketing team to see the results of their campaigns.
When marketing was done through TV and Radio channels, it would take weeks or months for the effect of the campaign to be seen.
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Digital marketing allows companies to receive immediate feedback:-
An advertisement on the digital platforms collects user’s feedback in a short amount of time.
There are different metrics which companies use for measuring the success of the marketing campaign.
Parameters like a number of clicks on the advertisement, the amount of time spent by users on the product website, etc. help the marketing teams to tailor their campaigns in a better way.
These were steps in improving marketing strategies on digital platforms. Facebook took digital advertising to the next level.
Facebook has a database of global users. Digital marketing provides benefits like instant feedback and worldwide exposure to their target audience.
The traditional marketing strategy provides benefits like the ability to tailor marketing campaigns on a local level.
Facebook was able to come up with a hybrid strategy combining the benefits of traditional and digital marketing. It is common knowledge that Facebook collects information from its users.
This information is useful to connect advertisers with potential customers. In other words, Facebook optimizes marketing campaigns for buyers and sellers.
We have seen that our search results often end up being the ads shown on our Facebook timeline feed.
For example, suppose a user looks at the price of a bus ticket between two cities.
Facebook uses this information to fetch the most relevant ads for the user and displays it on their timeline. It is beneficial for both customer and advertiser parties.
Recently, there was a storm in the media about Facebook’s strategy to provide user data to advertisers.
The Congress in the United States of America had to intervene and interrogate Facebook on their information privacy policies.
In all honesty, Facebook has specific clauses in their terms and conditions agreement about using user information for ads. However, a large number of their users were unaware of these clauses.
The digital ads shown on Facebook made to suit individual users’ requirements is the biggest source of income for Facebook.
The amount of income Facebook generates from digital marketing is unknown because Facebook Inc. presents its total revenue figures without a breakdown.
One can estimate the numbers for themselves, given that Facebook earns more than USD 40 billion in one year, and digital marketing is the largest source of their income.
Facebook uses the same model for all of its subsidiary companies like Instagram and WhatsApp.
WhatsApp user information
Data is powerful. Information is subject to monetization. We have undergone an evolution from Neanderthals to our present human form.
Information was the key to the evolution of mankind. We learnt to create life on Earth and nurture it.
Sharing information for centuries and adding more information for helping future generations. Information is the most powerful resource in the world.
With more than 1 billion active users sharing more than 55 billion messages per day, WhatsApp is one of the most significant sources of information.
WhatsApp does not share user information with other companies directly.
However, there is a feature in WhatsApp, which allows Facebook to access information from WhatsApp messenger.
This feature shares information with Facebook on default mode. Users must manually deactivate the feature to stop Facebook from accessing their data from WhatsApp messenger.
The large database of customers and lack of awareness about WhatsApp messenger’s terms and conditions contribute to a large amount of user data being made available to advertisers.
WhatsApp messenger follows Facebook’s business model. It collects information from users for Facebook to use for digital marketing on their social media platform.
There have been assurances made by Facebook about data privacy issues on WhatsApp.
WhatsApp messenger is a text messaging application and contains confidential chats between friends, family members, and businesses.
Compromising the information available on WhatsApp for digital marketing is a growing concern for many users.
WhatsApp ensures an end to end encryption of text messages and media files. According to WhatsApp policies, the information sent by users is available to the sender and the receiver.
However, in the 2018 Congressional hearing, news broke out about a large amount of user information was made available by Facebook from WhatsApp to advertisers.
Ultimately, WhatsApp is a service reliant on its number of users and the amount of interaction between them. Their business plan revolves around acquiring more users.
There are some markets with higher growth potential than others. India, for example, is one of the biggest markets for WhatsApp messenger.
According to a report on NDTV Gadget website, WhatsApp had more than 200 million users in India by February 2017.
In terms of WhatsApp’s user database, India has more than 10% share of all the users.
It is clear that WhatsApp has a successful growth strategy, especially in India and South America.
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Text messaging apps acquire more users on the basis of cultural norms.
If WhatsApp is a popular text messaging service in a social circle, naturally, the entire group must adopt WhatsApp to communicate with each other.
WhatsApp has become an important application for communication between people. The prerogative in most groups is on people not using WhatsApp to start using WhatsApp.
The other option is to be left out of group conversation if the user is unwilling to use WhatsApp. The popularity of WhatsApp has made it an indispensable mode of communication.
There are other text messaging platforms competing with WhatsApp for users. The nearest rivals of WhatsApp, in terms of the number of users, are iMessage and WeChat.
However, these text messaging services face different challenges in growth. iMessage is a text messaging service, similar to WhatsApp, but it only works on iOS and other Apple platforms.
WhatsApp is available on all platforms including Android, Windows, iOS and KaiOS.
WeChat is a text messaging tool for sharing text and multimedia messages between users. It has more than 1 billion users, 90% of whom are from China.
WhatsApp has a stronghold over many different markets. It is flexible across different platforms and operating systems. It reaches a broader audience around the world.
All these factors help WhatsApp in monetizing its services better than their competitors. In the last two years, WhatsApp has undergone a lot of improvements.
WhatsApp provides users with options to call other users in audio and video formats. There are options to add up to 4 users in an audio or video call on WhatsApp.
Similar to Instagram stories
WhatsApp allows users to set the status for a time period of 24 hours. The status disappears after the 24 hours are over.
These features make WhatsApp preferable for new users, or for existing users of other messaging services to switch over.
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Potential to earn more:-
We have seen the different factors behind the success of WhatsApp. These factors help us to understand the widespread appeal of WhatsApp.
One may ask, how do these factors translate into money? WhatsApp is taking steps to improve the potential for monetization of its services.
WhatsApp will be able to generate income, without relying on user information for digital marketing, through the use of these new services.
In January of 2018, WhatsApp came out with WhatsApp Business. WhatsApp Business is a platform for small scale business owners to communicate with their customers.
It allows business owners to create their profile describing important information like product information, store location, etc.
The information is useful for customers to learn more about businesses. It provides insightful analyses to the business owners about their customers.
WhatsApp came out with its API for medium and large scale business owners. An API (Application Programming Interface) is a set of instructions to facilitate communication between client and server.
Business owners can customize WhatsApp Business API to improve communication with their customers and market their products or services by sending push notifications to the customers.
A critical aspect of WhatsApp Business API is Facebook displaying ads for the businesses on their social media platform.
In other words, large or medium size companies can advertise on Facebook. The link in the ad will redirect the users to WhatsApp Business API for communicating with the businesses.
The users have the option of sending direct messages to business profiles. WhatsApp Business module is still in the process of launching across the world.
According to WhatsApp, there are more than 90 companies willing to test the business API features, including Uber and Wish.
According to a few experts, WhatsApp is planning to introduce ads in its Status feature for businesses.
The stance taken by Facebook on data privacy is neutral. There is insufficient clarity from Facebook about the priority of data privacy.
This gives rise to theories surrounding the use of user information. It is clear that WhatsApp is heading towards monetization by hosting businesses on its platform.
WhatsApp plans on becoming an intermediary between businesses and customers to start earning more revenue. WhatsApp’s growth potential increases due to its integration with Facebook’s digital marketing services.
Future options for monetization
In addition to all the above sources of income, WhatsApp has the potential to unlock many features to increase their earnings in the future.
WhatsApp can introduce freemium games on their platform for users to engage with. WhatsApp can add payment services on their online platform.
For example, users can pay their electricity bills or recharge their mobile phone data plans through WhatsApp in the future.
There are many different opportunities that Facebook could tap into in the future. It can form partnerships with other companies, and earn money for their services in connecting businesses with their customers.
The most obvious option would be to act as an intermediary between delivery service providers and clients. WhatsApp can be a useful platform for people to book cab rides or order food from restaurants.
Facebook Inc. management has clear intentions about the future of WhatsApp. The platform was made available for free of cost to the users to increase their subscribers.
WhatsApp, according to its COO, will start monetizing businesses to increase revenues. WhatsApp has shown no signs of slowing down, in terms of the number of active users signing up to the text messaging service.
The number of WhatsApp users will keep on increasing in the future. WhatsApp is available on desktop devices.
WhatsApp Web, the desktop version of WhatsApp text messaging service, provides users with most benefits of the mobile application.
It allows users to work on a single device instead of using multiple devices. For example, people working in an office can communicate with customers using email, voice call, and WhatsApp messaging from a single computer. WhatsApp
Web eliminates the need to go back and forth between mobile phone and personal computer devices.
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In summary, WhatsApp is a lucrative platform with immense potential for generating revenue.
Facebook paid more than ten times of the market valuation to buy WhatsApp Inc. The decision was neither irrational, nor was it a panic buy.
Facebook took advice from experts in valuations under consideration. The reasons behind spending USD 19 billion to buy WhatsApp text messenger are becoming clearer.
WhatsApp comes with a built-in audience of 1.5 billion users. These users, including people like us, are reliant on WhatsApp for maintaining contact with friends, family, and business leads.
WhatsApp has become an indispensable mode of communication for more than a billion people all across the world. It provides time to time improvements in services, and features.
The users have little to complain about WhatsApp because it is available for free of cost to use.
WhatsApp’s new plan, under the ownership of Facebook Inc., is to convert the number of users into currency.
There are steps being taken in the direction of monetizing different aspects of the text messaging service.
Its popularity in specific markets, like India, allows WhatsApp to introduce new features suitable for the needs of a large number of users. F
or example, in July 2019, The Economic Times wrote an article describing WhatsApp’s plans to launch a peer to peer payment system in India. The payment system can be monitored for 400 million users in India before launching it in other parts of the world.
WhatsApp is important in our day to day lives. The text messaging platform promises to make life easier for its users.
There are plans to introduce QR code scanning system in WhatsApp for adding new contacts. There will be provisions for sorting contacts by the frequency of interactions.
In addition, WhatsApp is making strides for engaging businesses on their platform.
WhatsApp will generate income by selling API, and related services to business owners for improving communication with their customers.
WhatsApp plans to diversify their services and the users of their services. Certainly, WhatsApp’s new direction is exciting for users and businesses.
The ability to explore a global audience of 1.5 billion users presents an opportunity for the business owners. The users can seek better engagement with businesses and, enjoy better customer service.
It is important to remember that WhatsApp plans on achieving its goals without compromising the user’s confidential data.
The end to end encryption service ensures the privacy of user information. The coming years will be immense for the financial growth of WhatsApp.
It has served the purpose of making communication easier for free of cost. WhatsApp will now help its owners and prove that the acquisition was a good value for the money spent by Facebook Inc.
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