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TikTok’s Magic Algorithm is an Economic Phenomenon


Gabriel Chenkov-Shaw

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March 29th, 2021


Whether you like it or not, TikTok has taken the world by storm as the latest viral phenomenon. Gabriel Chenkov-Shaw explores how economic fundamentals are relevant to its functionality and impact on e-commerce.


With co-dependency between ourselves and our phones being greater than ever, there is a slim chance you haven’t heard of TikTok. If you’re unfamiliar, TikTok is a social media platform that utilises a short video format alongside a personalised ‘for you page’ that somehow always shows you exactly what you want to see. For this reason, the application is incredibly addictive and presents some disturbing engagement rates, with its 1.1 billion active monthly users averaging 52 minutes on it a day [1]. To quantify this further, it was the most downloaded app in 2020 and presents the highest engagement rates per post out of any other social media competitor[2]. It has burst onto the scene in dominant fashion and has quickly overshadowed powerhouses like Instagram. This has created immense economic value for brands, with their ability to engage potential customers at an all-time high. The big question is: how on earth have they done this?           

The economic impact of TikTok is twofold: firstly, its algorithm captures demand to evaluate popular videos, then shows them to a relevant audience that enjoys that content. Secondly, it allows easy marketing of products to masses if producers create the right content, significantly lowering the barriers for firms to compete.

TikTok’s addictive nature can be attributed to its unparalleled algorithm, which delivers users the content they want to see most. This piece of code would be one of the most confidential and sought-after pieces of information in the world.  Other social media giants such as Facebook and Instagram mainly show their users content from creators they are already following, significantly reducing the new and exciting factor. Conversely, TikTok users are shown content they will enjoy regardless of whether they follow the creator. If you are someone that enjoys gym and fitness content, you are certain to be recommended workout videos, diet tips, and hacks to pack on muscle.

TikTok’s algorithm works as a sieve to find the most hooking videos.  Through the algorithm, they choose which videos go viral based on certain characteristics. When a video is uploaded, they will show it to a small sample of users and gauge how they interact with it. If the video boasts a high degree of engagement through likes, comments and shares, they will boost the video’s circulation[3].  If the video fails to engage many people, it will simply stagnate with little to no views. These metrics identify which videos deliver high utility and signal to TikTok that this video will keep users obsessed.  Take Charli D’Amelio as an example. An attractive individual with a bubbly personality, she utilises short dance videos with trending songs and has become TikTok’s biggest star. The application has recognised that this kind of media is in high demand and distributes it to millions of ‘for you pages’.

These engagement levels do not go unnoticed by profit maximising firms looking for an edge. These firms are constantly looking for emerging trends to better market their products. The fact that you only need a smart phone and engaging content to advertise to millions is truly disruptive. This provides a far greater return to firms than paying monumental sums for billboards, magazines ads, and TV commercials. Instead, they can pay a single content creator, send them a product, and produce a far more engaging and effective campaign[4]. This has completely disrupted the status-quo of firms competing with one another, as old firms that struggle with social media marketing are outperformed by those that pioneer it. This has made way for new-age firms that are riding the TikTok-e-commerce wave of organic marketing; those that have chosen to ignore it are being left in the dust.

The world has never seen a more organic and centralised form of communication than TikTok, with its success derived from its magic algorithm. Firms have the potential to disrupt their competitive markets if they can effectively utilise viral videos featuring their products. Whether you’re a fan of TikTok or not, its economic impact on today’s economy is undeniable.


[1] Mohsin, M. (2021). 10 TikTok Statistics You Need to Know in 2021 [March 2021]. https://au.oberlo.com/blog/tiktok-statistics

[2] TikTok Statistics – Revenue, Users & Engagement Stats (2021). (2021). https://influencermarketinghub.com/tiktok-stats/

[3] McGlew, M. (2020). This is How the TikTok Algorithm Works – Later Blog. https://later.com/blog/tiktok-algorithm/

[4] Epstein, A. (2020). TikTok is a sleeping e-commerce giant. https://qz.com/1918570/how-businesses-are-leveraging-tiktoks-growth-to-drive-engagement/

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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