Free Dinners, not Lunches: The Pricing Puzzle of Dating Apps
How do companies make money off apps that are ‘designed to be deleted’?
How I Met Your Mother
Our grandparents regale us with nostalgic tales of their courtship — featuring flowers, lengthy letters and, in some cases, even ballads of beauty. Our parents were more practical, often meeting at parties, weddings and Friday evenings at the local bar. Our generation marks a monumental shift in the way partners meet, which is increasingly online. Companies such as the Match Group (which owns Tinder, Hinge and a host of other platforms) and Bumble Inc. are transforming online dating from a niche market into a mainstream phenomenon. Internet and smartphone ubiquity, coupled with changing behavioural and societal norms, enabled these platforms to grow globally, successfully capturing eyeballs (and hearts, for the lucky few) across metros and big cities in rich and poor economies alike.
Freemium Frustration
While some elite dating service apps like Raya and The Lox Club work on memberships and subscription models only, market leaders Tinder, Hinge and Bumble operate on the “freemium” model, with a free membership but value-added premium services. This model is particularly puzzling because of the nature of the industry. Typically, companies in other industries that operate on freemium models (gaming, music streaming, etc.) continually extract a higher wallet share and sustainably extend customer lifetime value (CLV) from their paying customers. However, by nature of the online dating industry, a paying customer is statistically more likely to find a successful match and, as such, has no need for the product anymore (as Hinge’s tagline aptly reads — “designed to be deleted”). This sets up an interesting dilemma, in which dating apps target conversion to paying customers, a step that potentially harms them in the long run. My analysis examines this pricing puzzle, exploring and debunking potential explanations for the same.
Explanation #1:Freemium pricing is adopted to hook customers to the basic functioning of the app and then lure them into purchasing top-ups and premium features. Online dating apps purposely tweak their algorithms to prevent non-paying subscribers from meeting quality/desired matches, which tempts them into breaking the bank to access these.
Debunking the Myth: Although Average Revenue per User (ARPU) for dating platforms has been steadily increasing, paying customers represent less than 10% of the total for Tinder (and are below 5% for Hinge and Bumble). This is in sharp contrast to other freemium services like Spotify, which has a paid conversion rate of >40%. There is also a taboo against paying for online dating services, unlike with freemium models of music streaming and gaming.
Explanation #2: The freemium model counts on advertisements to subsidize its non-paying users. As a result, companies can maintain two distinct revenue sources that do not cannibalize each other. In fact, one of the draws of premium features for platforms like Tinder includes an option of “No Ads”.
Debunking the Myth: Unlike social media platforms and other freemium services, advertising accounts for a very small portion of revenue for these companies. Tinder has confirmed that it represents only a sliver of its revenues and in the case of Bumble it is a meagre 3% of total revenue. Hinge has done away with advertising altogether, even for its free-to-use customers.
Explanation #3: Freemium is the most optimal pricing mechanism, since mass-market platforms cannot afford to charge all subscribers a membership fee in an industry where paying for the service is still stigmatized. No alternative pricing scheme exists.
Debunking the Myth: Innovative apps can find customized ways of monetizing their product without resorting to the freemium model, which as explained earlier, leads to eventual reduction of CLV. Some of these options include:
a) Offerwalls — Users can complete virtual tasks in exchange for one-time tokens that act as a proxy to premium services. These tasks can be in the form of both internal and external advertising.
b) Data Swaps — Given that dating apps reveal a lot of personal information about users (age, location, preferences, hobbies, etc), apps can trade virtual tokens used to unlock features in exchange for permissions to sell this data to third-parties. This option would be more suitable in emerging economies where data protection rights are limited.
c) Unlocking individual matches — Dating apps can take a leaf out of the monetization book of matrimonial sites like shaadi.com, which allow users to create profiles for free, but charge them on successful matches. While this isn’t feasible at scale for mass-market apps, it can be a useful alternative to premium features for users that want particularly customized matches.
Seeking Dates or Data?
As is the norm with tech companies, it is entirely plausible that instant monetization is not on the radar for dating platforms. Legacy industries ranging from hospitality to financial services have been disrupted by technology-enabled upstarts that forgo short-term profit for long-term gain, by collecting, harvesting and analyzing troves of information centred around customer data to interpret consumer habits and behaviour. Dating apps can determine whether you prefer dogs or cats, brunettes or blondes and what alcoholic beverage you’re most partial to. The targeted advertising opportunities are endless.
A fun icebreaker topic to debate on your next blind date — who is really making money off your match?
