Today we're going to talk about Tinder, the company that made swipe right and swipe left
universal language around the world. Tinder is not just an interesting company for its
social networking aspects, but probably more importantly from our view, their strategy.
And if we're going to break it down, we're going to talk about four things for Tinder.
First of all, we're going to talk about the history of the company, how they built what
they built. Second of all, we're going to talk about the business model of Tinder.
Is it a fixed cost or variable cost business. Third, we're going to talk about whether Tinder is
successful in the way that it needs to be in the business model that it's currently operating in.
And fourth and finally, we're going to talk about what potential future challenges or opportunities
are posed for an organization like Tinder. Most of you probably know or have heard of Tinder.
Maybe not all of you have used it. Maybe some of you have, but we’ll pretend that you haven't.
And Tinder is a very interesting case study, just in the development of the company. So let's spend
a minute on that talking about it. Tinder was launched in 2012, and it was launched as a joint
venture between parent company IAC, which owns Match Group, and a mobile app development firm.
And Tinder originally required that users, in order to use it, had a Facebook account. So it had
a companion - it was a companion app, or it had a companion in Facebook. And originally it launched
on university campuses like a number of other famous brands such as Facebook, and they piloted
that app in a way that you were accessing members of your community that were close, geo-located.
So it was then branded a geosocial app. And one of the things that was pretty revolutionary about
Tinder that has now, of course, made its way into a number of other apps and user functionality in
different domains is the swipe right and the swipe left functionality, which made it really easy
for people. Instead of previously in Matchmaking apps or exercises, where they had to read through
something, open up and initiate a chat, it was a super easy way to make connections. However, one
thing that you can't argue with are users. If you look at just the last couple of years for Tinder,
what you can see is that they grew from a scrappy little startup on college campuses to, in 2018,
about 3.7 million paid subscribers on a monthly basis, up to in 2019, 5.2
million paid subscribers. And in 2020, of course, still will remain to be seen. In just
a minute we'll look at the financial statements of Match Group, in which Tinder is baked, and we'll
kind of try to understand some verification of their business model. But one thing that we can
definitely see is that the platform has expanded. So the ease of use and the value proposition
has remained really strong over the last eight years. Second thing that we want to talk about
is strategy simplified. So all of that's interesting. They did this very kind of like,
you know, focused approach to build a user base and scaled super quickly. But what makes Tinder
Tinder from a business model perspective. What makes it an attractive property from a business
model perspective. And we have two choices here. We have variable cost or fixed cost. So I’ll give
you just a second to think about which one you think it might be: variable cost or fixed cost.
And if you said you thought that it was a fixed cost business, in this case you're totally right.
Tinder is a fixed cost business which drives in the strategy simplified framework a very clear
focus on what they need to adopt, which are two things. They want to maximize the capacity
utilization that they have. So in Tinder, the capacity is cloud storage and the ability for
somebody to utilize their platform. In this case, because of the lightweight way that our tech works
now, that's a very low fixed cost to manage. There are variable costs that go into the management of
a platform like this, but the other big fixed cost that we need to make sure we note is development.
So on an ongoing basis you have capacity that's managed by storage, but the development of the
functionality inside a company like Tinder, that's going to be our real fixed cost. In addition,
there are some fixed marketing expenses. If you've ever seen an ad for Match or Tinder or any of the
brands that are under that portfolio, well those are fixed costs. When they pop those out there,
there's no guarantee of how many people see them and they pay for the slot regardless of usage.
But as we're seeing a trend in digital media to more of a pay-per-click or a pay-per-watch kind of
advertising system, you'll see a little bit more of a shift to variable cost. However,
it doesn't change the dynamics overall. This is a fixed cost business. So what does that mean? They
want to drive maximum utilization of the platform. What does that mean? Maximum users. And it doesn't
mean all users at any price, it means that they want to maximize the revenue of their user base.
And so Tinder, for its fees, you're never going to see a $700 Tinder fee because
that would preclude too many users from the platform. And having a large user base for
something like Tinder is really important. But also maximizing revenue is important,
so there's a happy medium in between, and you'll see the Tinder prices are going to be affordable
but still not nothing every month. Tinder also has, of course, a free - a freemium model,
and those are in there utilizing some of the capacity. Not all of it, but some of it,
as a way to enhance marketing and conversion potential going forward. So what's made Tinder
successful? It's made it incredibly easy to access love in whatever form you define that to
look like. And Tinder in overall, in its platform therefore has driven usage. And so with the usage
comes that capacity utilization overall. That's a good thing. So let's go over to the financials and
confirm this because if we see in the financials that we have a primary portion of their costs
that are fixed costs, it'll confirm it. And of course Tinder is not a standalone company,
so we're going to have to look at Match Group overall. But this is a really interesting 10-K
to take a look at. And so we're going to go immediately to the financial statements. And
as you know, when I look at financial statements, I do a quick and dirty overview of them.
The balance sheet is the one in this that comes first, but I’m not super interested in how much
cash they have on hand. That's going to be for Match overall, and that's going to determine
some of the things that they'll invest in in the long term. But what I’m interested in
is understanding operations. And so that's going to be the consolidated statement of operations,
or the income statement. So we look at their revenue in 2019, we're looking at $2 billion
of revenue for Match Group overall. Their cost of revenue, which I’m a little actually interested
in. I mean that, to me, cost of revenue for this business seems like it's going to be
that social media kind of advertising where I’m only paying when somebody is converting,
and/or maybe credit card processing fees. But I’ve got $500 million of that. However, of revenue,
that's only 25 percent of my revenue. So either I’m crushing it and taking a huge amount of this
home and profit, or more likely, there's probably another cost that's more expensive. So then
when we add the selling and marketing expense, $427 million, which is where probably more of
that advertising comes in, the $255 million of general and administrative expense,
that's salaries, overheads, offices, etc. And product development expense of $152 million.
When we add all of those together, we actually start to see the bigger picture, which is that in
total that brings us way over that $500 million of the cost of revenue dominating the portion of cost
that goes to fixed costs. So this is confirmed to be a fixed cost business. Now in general,
what makes a fixed cost business successful? Like I talked about, high capacity utilization
and the ability to maximize revenue. And so when you see with this user base, and probably very
small incremental cost to add storage, we're looking at a really great business driver. So
one of the things that Tinder's done is bring down that barrier to entry, make it affordable
and easy to use in order to access a ton of users onto what is a very low cost over time platform.
In addition, they've taken measures such as making emergency calls from within the app a possibility
in order to drive the sense of user safety, and to continue to drive incremental change in their user
population. So ultimately, what do they need to do to be successful going forward? It's the same
thing that they've done today. They need to drive users and keep the cost low enough that the users
can access it to drive a big population inside Tinder. But also high enough to maximize their
revenue inside the platform. Ultimately, this is a company I think that's really worth looking at
because of the high margins overall, and also what the power of what scale can do over time as you
grow a business like this. This is software as a service at its best. So we hope that wherever you
are, if you haven't found love, that you're in the process of figuring it out. And in the meantime,
if you're not sure about finding love, at least you can find a great business model in Tinder.
We hope that you enjoyed this, and we'd love for you to stick with us. Subscribe
to our channel on YouTube and to our podcast, Strategy Simplified. Thanks so much for joining.