Free Dinners, No Lunches: The Dating App Pricing Conundrum | by Zarir Marfatia | Jul 2022
How do companies make money from “designed to be removed” apps?
how I Met Your Mother
Our grandparents regale us with nostalgic tales of their court – complete with flowers, long letters and, in some cases, even beauty ballads. Our parents were more hands-on, often meeting at parties, weddings, and Friday nights at the local bar. Our generation marks a monumental shift in the way partners meet, which is increasingly online. Companies such as 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. The ubiquity of the internet and smartphones, coupled with changing behavioral and societal norms, has allowed these platforms to grow globally, successfully capturing eyeballs (and hearts, for a lucky few) in metros and major cities in rich and poor economies.
While some elite dating service apps like Raya and The Lox Club operate solely on memberships and subscription models, market leaders Tinder, Hinge and Bumble operate on a “freemium” model, with a free membership but premium services with added value. This pattern is particularly confusing due to the nature of the industry. Typically, companies in other industries that operate on freemium models (gaming, music streaming, etc.) continually extract a higher share of wallet and sustainably extend the customer lifetime value (CLV) of their paying customers. However, by the nature of the online dating industry, a paying customer is statistically more likely to find a successful match and as such no longer needs the product (as the tagline aptly puts it). from Hinge – “designed to be deleted”). This creates an interesting dilemma, where dating apps target conversion into paying customers, a step that potentially hurts them in the long run. My analysis examines this pricing puzzle, exploring and demystifying potential explanations.
Explanation #1:Freemium pricing is adopted to hook customers into the basic workings of the app and then incentivize them to purchase premium top-ups and features. Online dating apps deliberately change their algorithms to prevent non-paying subscribers from encountering quality/desired matches, causing them to go broke for access.
Debunking the myth: Although the average revenue per user (ARPU) of dating platforms continues to increase, paying customers represent less than 10% of the total for Tinder (and are less than 5% for Hinge and Bumble). This is in stark 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 as opposed to freemium models of streaming music and games.
Explanation #2: The freemium model relies on ads to subsidize its non-paying users. As a result, businesses can maintain two separate revenue streams that don’t cannibalize each other. In fact, one of the draws of premium features for platforms like Tinder includes a “No Ads” option.
Debunking the myth: Unlike social media platforms and other freemium services, advertising is a very small part of these companies’ revenue. Tinder has confirmed that it only represents a fraction of its revenue and in the case of Bumble, it only represents a measly 3% of total revenue. Hinge has completely removed advertising, even for its free customers.
Explanation #3: Freemium is the most optimal pricing mechanism, as mainstream platforms cannot afford to charge all subscribers a membership fee in an industry where paying for service is still stigmatized. There is no alternative pricing system.
Debunking the myth: Innovative apps can find custom ways to monetize their product without resorting to the freemium model, which, as explained earlier, leads to a possible reduction in CLV. Some of these options include:
a) Offer Walls — Users can perform virtual tasks in exchange for unique tokens that act as a proxy for premium services. These tasks can take the form of internal and external advertising.
b) Data exchanges — Since 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 appropriate in emerging economies where data protection rights are limited.
c) Unlock individual matches – Dating apps can take a leaf out of the book of monetization from dating sites like shaadi.com, which allow users to create profiles for free but charge them on successful matches. Although not feasible at scale for consumer applications, it can be a useful alternative to premium features for users who want particularly personalized matches.
Looking for dates or data?
As is the norm with tech companies, it’s entirely plausible that instant monetization isn’t on dating platforms’ radar. Legacy industries, ranging from hospitality to financial services, have been disrupted by tech startups that forego short-term profits for long-term gain, collecting, harvesting and analyzing reams of data-centric insights from customers to interpret consumer habits and behavior. Dating apps can determine whether you prefer dogs or cats, brunettes or blondes, and which booze you prefer more. The possibilities for targeted advertising are endless.
A fun icebreaker topic to discuss on your next blind date – who really makes money from your match?