WeChat is the most popular instant messaging apps in China. WeChat user amount has increased rapidly and reached 438 million in the second quarter of 2014, with a 57 percent improvement from the same time last year. It is the second most popular messaging app globally, with WhatsApp ranking number one with 600 million active users. It took WhatsApp four and a half years to reach 400 million monthly active users; while it took WeChat only about 3 years. What is its business model? Why is WeChat so successful?

General Business Model — Multisided

WeChat provides diversified services and its business model is complex. As WeChat serves different parties (both individual users and service providers), its business model is a multi-sided model.

Business Model to Individual Users — Freemium

Nowadays, there are four main models for online services:

1. Free for download, but charges annual subscription fee and ad-free, e.g. WhatsApp;
2. Charge for download, then free for use and ad-free, e.g. Oxford Advanced Learner’s Dictionary app;
3. Free for download/use, but there will be advertising throughout the service, e.g. Facebook, Google search;
4. Free for download and basic use, but charge for premium functions (i.e. Freemium).

In the age of the Internet, any business model of online products is built on the base of customers’ habit. So what do customers love? Free spirit for sure. Therefore, WeChat adopts the Freemium Model to sustain its business while acquiring new users. WeChat is free for download. Its instant messaging service, Moments, even games are all free. Its revenue is mainly from value-added services like games and virtual stickers.

1. Gaming has been a strategic part of generating both users and revenues for Tencent. It has a game center which serves as a gaming platform integrating games on other Tencent platforms including QQ. WeChat also partners with King and launched its first non-Chinese game Candy Crush Saga to reach outside of China. Gaming is one big stickiness factor to users. When Poshu Yeung, vice president of the international business group at Tencent, was asked why WeChat’s games would appeal to users compared with standalone games, Yeung explains that games on the messaging service are closely connected with its social features. How does Tencent make money by free games? Firstly, it attracts downloads by emphasizing it’s free; and then they encourage users to share the scores or results among WeChat friends and invite them to play together and compete. These two steps help grow the user base, thanks to the network effect. Last but not least, to beat your friends or other players, you may need extra weapons or lives in the game which means you have to pay for these value-added services. This contributes greatly to Tecent’s revenue. According to Tencent, in the second quarter of 2014, online games revenues (including Mobile QQ, Wechat etc.) increased to RMB11,081 million.

2. Virtual stickers have been very popular in Asia. They are indispensable parts of casual chatting. Sometimes one sticker can quickly and vividly express what people want to say. On WeChat (in HK), there are more than hundreds of virtual stickers of popular manga, anime and cartoon characters, and some are from Disney, Sanrio or Pixar. Most of these stickers are free, but for those very popular like Hello Kitty or characters from Monsters University, each will cost HK$7 for a set of 16~24 stickers. This can be a million-worth business. Its main competitor Line, who started up this business first, has generated US$31.5 million gross sales revenue from stickers in the third quarter of 2013.

Business Model to Business Partners — Online-to-Offline (O2O)

Tencent also extends its service to e-commerce Wechat Payments (only available in China) and O2O services. It allows users to bind their bank account with Wechat, making their cellphone a wallet. When purchasing items, they just need to scan the item’s QR code in store or click the item on Wechat if the brand has official account on Wechat, and then enter the password, and the deal is completed. By doing this, Wechat has connected the offline businesses to online platform, so that there will be more exposure for retailers. For Wechat, this will attract more users, and it can collect data from customers, like transaction rates of products, demographics of customers and feedbacks from the customers, etc. With a big enough database, Wechat can in return give suggestions to consumers and business partners. Apart from these big data, what Wechat earns will be commission of course. For consumers, they can benefit from saving time and getting a slight discount on Wechat. This business is thriving in China, and Wechat’s e-commerce partners cover a large area of daily life services: JD.com, McDonalds, Starbucks, just name a few. According to Tencent, revenues from e-commerce transactions business was RMB1,324 million in second quarter of 2014.

WeChat’s success factors can be summarized as below.

1. Strong support from parent company Tencent. This helps promptly transfer users from QQ to WeChat and captures the market of IM within China faster than other international competitors like WhatsApp, Line, KaKao Talk, etc.

2. Freemium business model. Free basic services help to attract users and expand user numbers in a short time and retain customers. Monetization is much easier if there is a large group of loyal users.

3. Multi-function. By offering diversified social related services, it helps to stand out from similar IM apps which only offer messaging service. It also helps to increase stickiness to retain existing users. Multi-functional services also mean more opportunities and channels to make money.

4. Free of ads. WeChat is for close relationship circles. In this environment, people would not expect hard-selling ads, but just user generated contents. Users can only find and follow the public accounts unless they know the name. Tencent doesn’t provide a list of public accounts for users. Tencent has also limited the daily promotional messages sent out by public accounts8.

5. Partnership with leading service providers. This helps to make the cake bigger and results in a win-win situation. Plus, WeChat can collect marketing and demographic metrics for future development.