Reports of TikTok Shop increasing its commission fee has caused quite the frenzy online. Some have described the move as completely expected; others have described it as pretty absurd and are ready to delete the app.
Here’s an overview of TikTok Shop fees. Before you simply delete the app and rely solely on other social commerce platforms, use this information to make an informed choice. For a deeper dive into how TikTok Shop is revolutionizing social commerce, check out this episode, where Thomas Carter, Director of Paid Media at MomentIQ, discusses strategies leading brands are using to achieve massive success.
What Are Referral Fees (and Why the Uproar)?
Sellers need to pay a referral fee for all qualified transactions (orders that have been completed). You can think of it as a service fee.
To understand the hooha about referral fees, you first need to understand the background. TikTok announced earlier this year that it will increase the referral fee from 2% to 6% on the first of April, 2024. While 6% doesn’t sound like a lot, it works out to a 300% increase which is pretty steep.
Then, to add fuel to the fire, it will again increase the fee to 8% in July.
Basically, it’s giving sellers and buyers a three-month reprieve to get used to the higher referral fee.
That being said, you need to keep in mind that when it first launched in the United States in September 2023, the prices were strikingly low compared to other online marketplaces. As one Reddit user, “fezz4734”, puts it, “TikTok never intended to take the loss for long but hey those discounts were nice”.
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Another Reddit user, “LaughLearnPunk”, shares the same sentiment commenting, “It was a wild and great ride. This was to be expected. I hope you all ate.”
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Even Wired described the initial experience as “deals that can seem too good to be true” and “ultracheap stuff” in a recent article, TikTok Shop’s Era of Super Subsidies Is Ending.
You see, for those initial months, TikTok offered subsidies, hot deals, and coupons to encourage buyers and sellers to join. In fact, an article Sellercloud published mentions that TikTok Shop spent around $500 million supposedly on merchant subsidies in 2023.
In hindsight, though, a number of TikTok users feel that this was some sort of ploy to collect data. As “skuffyslurd”, another Reddit user, shares, “They’ve been supplementing sellers for the difference coupons provide on user purchases via their shop. Now that they’ve collected data and see the only time users buy items is with coupons, they’ve determined they need to make up revenue somehow.” This theory received dozens of upvotes, suggesting that the sentiment is shared.
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Speculations and grievances, aside, the fact remains that sellers need to pay a referral fee on all completed orders. As mentioned, it’s currently set at 6% per order. It includes all TikTok Shop fees, but excludes shipping and taxes.
The good news is that there are a few product categories that get charged about 1% less. These include:
- Pre-owned bags
- Pre-owned collectible trading cards
- Pre-owned watches
Plus, for these categories, any portion of the sale over $10,000 gets charged only 3%.
How Can You Pay Less Fees?
TikTok is currently running a referral fee promotion program aimed at new merchants. Launched at the beginning of February 2024, it will run till the end of October 2024.
To qualify, you need to be a new merchant with an “Active” status on Seller Center. This status simply means that you’ve completed onboarding.
If you’re eligible, you’ll pay only 2% plus $0.3 per completed order for the first 60 days. This rate will only apply to the first $500,000 of sales. Once you exceed this amount or pass the 60-day period (whichever one comes first), you’ll be charged the standard referral fee for your product category.
This is the calculation formula that TikTok shares on its TikTok Shop Academy page:
Referral Fee Calculation Formula
Referral Fee = 2% x (Customer Payment + Platform Discount) + $0.30 per order
Other Fees
Like most other websites for selling products online, sellers will also need to pay additional fees and taxes. Here are the extra fees that sellers also need to budget for:
Refund administration fees
If a customer cancels a transaction or returns a product within the return period, a portion of the TikTok Shop referral fee will be refunded to the seller. The platform will deduct what they call a “Refund Administration Fee” which is set at 20% of the referral fee. In other words, the seller will end up getting 80% of the paid referral fee returned to them.
This is the calculation formula that TikTok shares on its TikTok Shop Academy page:
Refund Administration Fee Formula
Referral Fee = (The Referral Fee Rate Percentage) x (Customer Payment + Platform Discount - Tax)
Sales tax
Yes, buyers need to pay taxes. TikTok acts as a marketplace facilitator. As such, they’re required by US law in the vast majority of US states to calculate, charge, and collect sales tax on any sale made via TikTok Shop. Simply put, sales tax is consumption tax placed on the sales of goods and services in the US.
The product’s price as it’s displayed in TikTok Shop excludes this sales tax. It will only get added once a shopper checks out. The platform uses a third-party tax engine to work out the amount using the product category and buyer’s shipping address. The seller’s location doesn’t play a role. Even if you’re located outside of the US but selling to a US-based buyer, the sales tax will be levied.
Ad costs
Here’s the thing about selling on TikTok, you have to put in a concerted effort to stand out. Michael Yamartino, CEO of Route, a post-purchase experience solution, explains in the Wired article written by Amanda Hoover that TikTok users are often using the TikTok app to do something completely different than shopping and to get their attention and turn funny video browsers into buyers you need to be loud.
As such, TikTok sellers also need to budget for other costs relating to production and advertising. TikTok Shop provides various promotional tools, including ads and featured placement within the marketplace. These promotional services come at a cost, typically structured as either a flat fee or a bidding system where you compete with other sellers for premium visibility.
You can also leverage affiliate marketing. Sellers can engage with TikTok content creators to market their products. There’s the Open Plan option where TikTok Shop will show your product to all the creators with eCommerce access on the platform. With this option, you get to set the commission that you’ll offer the creator.
Alternatively, you can also do targeted outreach and contact creators in your niche directly. If you prefer offering a free sample instead of paying a set commission, you can suggest this payment arrangement. Keep in mind, though, that giving free product samples is no longer the dominant trend. Our The State of Influencer Marketing 2024: Benchmark Report found that about 40% of brands offer monetary compensation, while 30% offer free products.
Offering a discount on a product is another option. However, less than 20% use this method to pay influencers.
TikTok also offers their own fulfillment service — Fulfillment by TikTok Shop (FBT). It’s optional and exact costs aren’t published on its website, but according to TikTok Shop Academy, it’s competitively priced. Sellers also won’t pay receiving, first-item pick or packaging fees. It also includes 90-days free storage per inbound shipment. Some sellers, like Ning Cheah, The Beauty Crop’s founder, have reported decreasing late dispatch rates by more than 45%.
Financing Your TikTok Shop
TikTok Shop also offers business financing solutions to pre-qualified sellers. Kanmon, a third-party, licensed business lender that works with industry-specific software companies, finances the customized offers.
Called TikTok Shop Capital, the program is currently invitation-only. Financing offers are made based on your TikTok Shop sales and are only available to US-based businesses that have been in trading for at least a year already. Kanmon will also conduct a credit check, but joining the program won’t impact your credit score (they’ll only do a soft pull of your credit report).
Other factors that will be taken into account include:
- Outstanding debt balance
- Business expenses
- Account history
- Payment frequency
According to TikTok Shop Academy, the process is super fast. The onboarding process takes less than 10 minutes to complete and, if approved, you’ll receive your funds within two days (possibly within 24 hours).
Repayment is done via auto-pay deductions made from your business bank account. Kanmon will schedule these repayments automatically. If you want to repay your loan early, you can do so without facing any penalties.
Going Forward: Price Predictions
The prediction is that sellers will increase their prices in order to make up for the higher seller fees. This will ultimately test TikTok buyers’ loyalty. Jasmine Enberg, Insider Intelligene’s principal social media analyst, also highlights that many of the successful sellers on TikTok Shop are small businesses. She predicts that these sellers in particular will struggle if the platform continues to increase its fees.
That being said, the fee structure for TikTok Shop is designed to be straightforward. If small businesses understand the specifics, it’s still entirely possible to manage finances effectively. This way, you can factor these costs into your pricing strategy.
Then, use the various tools and insights aimed at sellers to optimize your store and sales strategies. Make use of these analytical tools to understand consumer behavior and tweak your approach for better results and in doing so offset the costs.
Frequently Asked Questions
How does TikTok Shop work?
TikTok Shop is an innovative feature that’s integrated within the social media platform. It offers an in-app shopping experience that lets TikTok users discover, browse, and buy products directly through the app by clicking on a tagged product in a livestream, the product’s link and basket item in a shoppable in-feed video or via the account of the creator or brand. Users are also welcome just to browse by viewing products in the Shop tab.
When will I get paid with TikTok Shop?
TikTok uses third-party payment service providers to collect, process, settle and refund transactions. Payouts are made between 1-8 days after an order delivery date. Sellers boasting an excellent shipping performance can receive faster payouts.
Does TikTok Shop charge shipping fees?
Yes, TikTok Shop offers both Standard Shipping and Express Shipping services for sellers. Sellers can pick shipping options from leading carriers and compare rates upon label creation. The standard shipping service is the default shipping option. To see the shipping cost, you can use the shipping calculator by entering your seller center account and entering the specific shipping details. For example, heavier or larger items will cost more to ship as surcharges may apply.
How can you manage TikTok Shop fees?
High-quality, engaging product listings can improve conversion rates and minimize the need for paid promotions. Use compelling visuals and descriptions to highlight the unique features of your products. Additionally, leveraging TikTok's native features, such as hashtags and challenges, can increase organic visibility.
How can TikTok sellers maximize profitability?
While these fees are a necessary part of doing business on TikTok Shop, there are ways to ensure your venture remains profitable. This includes:
- Ensuring that your product pricing covers your costs while still being competitive and attractive to TikTok users
- Looking for ways to reduce costs in other areas of your business, such as sourcing, production, and shipping, to offset the fees incurred on TikTok Shop
- Focusing on creating quality, engaging, and creative content to achieve better sales volumes, diluting the impact of transaction fees over larger sales numbers
