Reddit Machina: Monetizing the edges of the Internet
From Subcultures to Revenue Streams: Reddit’s Balancing Act in the Digital Age
For the past twenty years, Reddit has served as a gateway to the edges of the Internet. This community-centric platform occupies a unique space: simultaneously mainstream and underground, social yet anonymous, highly moderated yet a bastion of polarizing speech.
At the heart of Reddit’s ecosystem are its 138,000 active Subreddits, where over 500 million posts are shared annually. These decentralized, autonomous communities are the lifeblood of Reddit, each revolving around specific topics or interests and governed by Moderators (or "Mods"). These Mods hold significant political power, enforcing rules and norms that shape their communities’ cultures—but wield no economic authority.
This power dynamic came to a head in April 2023, when Reddit announced plans to monetize its previously free API. In response, over 8,800 Subreddits went private, effectively shutting down portions of the platform to protest what many saw as Reddit’s disregard for its moderators’ pivotal role.
It’s hard to imagine such grassroots influence on centralized platforms like Instagram, TikTok, or X. Reddit’s unique decentralized governance enables its Subreddits to flourish with distinct cultures, each boasting its own memes, language, and norms. Yet a meta-culture underpins it all—one rooted in anonymity and skepticism toward the self-promotional consumerist spam that populates so many social media networks — which has made Reddit an uneasy partner for advertisers.
Reddit’s relationship with advertising has long been fraught. Unlike Instagram’s polished feeds or TikTok’s immersive short-form content, Reddit’s anti-consumerist ethos often clashes with traditional marketing tactics.
As such, you can imagine my surprise when I came across the following two profiles in my inbox in a span of a day.
Clearly, recent developments suggest a deliberate pivot. Media outlets like Glossy and Modern Retail—both owned by Digiday—recently published favorable coverage of Reddit’s advertising efforts, hinting at a coordinated PR campaign to reframe its narrative.
This shift raises critical questions: How is Reddit leveraging its unique structure to attract advertisers? Can it strike a balance between monetization and preserving its community-first ethos? To explore these questions, let’s dive into Reddit’s core products and its evolving advertising business.
Reddit’s Core Mechanics
The quality of a social media network is rooted in its ability to show users content they are likely to enjoy.
This requires a few things. For one, users need to publish content on the network, which we call user-generated content. And two, the network needs to share this content to users whom have the highest likelihood to enjoy it; the mechanism by which we call its algorithm.
By doing so, the network creates value for users who find its content entertaining, informative or social. Users then view, like, comment or share the content — rewarding the content creator with social capital and improving the network’s algorithm and approximation of its users’ interests. This, at the atomic level, creates network effects for both content creators and users. I wrote on this more below.
The Quantum Mechanics of Social Networks
A few weeks ago I saw Christopher Nolan’s Oppenheimer. One scene, in particular, has remained with me. In it, Oppenheimer (Cillian Murphy) chats with Jean Tatlock (Florence Pugh) at a dinner party. There, Oppenheimer describes how we, as most things in the Universe, are largely empty space that are being held together solely by the whims of subatomic…
Different networks take different approaches on how to do this.
For Reddit, this hinges on two key actions:
Joining Subreddits, an explicit signal of user interests.
Upvoting and downvoting posts, enabling users to collectively surface the most relevant content.
When a user joins a Subreddit, they enter a flywheel that:
Personalizes a user’s homepage.
Grants access to Subreddit-specific content and communities.
Allows Reddit to build user personas for more accurate recommendations and targeted advertising.
This mechanism transforms Reddit’s homepage into a hybrid space: part aggregator of user-selected interests, part discovery engine for serendipitous content.
As you can see, my Reddit Homepage is personalized for me based on the Subreddit communities I belong to.
Reddit recommends posts from Subreddit’s that a user is not a member of in order to:
Avoid the cold start problem by populating the Homepage with a plethora of content regardless of a user’s Subreddit following
Push users to complete the core action of joining Subreddits
Which increases user retention
And improves Reddit’s approximation of a user's interests and its ability to service them relevant content and ads:
Improve Reddit’s value proposition of discovery by showing users content outside their explicit interest and intent, ideally leading to:
More time spent on Reddit, which leads to:
More ads serviced per user session, which leads to:
Higher average revenue per user (ARPU)
Increase in total ads delivered (ad inventory supply)
Which lowers ads prices and increases advertiser demand (and retention)
Reddit’s algorithm recommends posts based on four specific criteria, which they display in the post’s heading. They are:
Because you visited this community before
Similar to r/[Subreddit you belong to]
Because you've shown interest in a similar community
Popular on Reddit right now
The distribution frequency of these various content types determines the user experience and the utility, or enjoyment, users receive from the network.
To understand Reddit’s distribution algorithm, I went through my Reddit Homepage and recorded the frequency of each content types over a sample of 100 subsequent posts.
As you can see, 43% of Homepage posts were from Subreddits I follow (am a member of), 42% were from Subreddits I don’t follow but Reddit recommends based on (a) popularity, (b) past behavior or (c) similarity to Subreddit’s I follow, and 15% of content were advertisements. This mix transforms Reddit’s homepage into both an aggregation of user interests and a discovery channel for new content.
This dual approach mirrors the broader industry shift from follower graphs to interest graphs, where algorithms prioritize implicit content relevance over explicit social connections or community interests. As a result, Reddit has managed to increase user engagement, with average daily time spent on the platform rising to 31 minutes in 2024, up from 28 minutes in 2023.
Reddit’s homepage is also its primary advertising real estate. Content is divided into three categories:
Organic: Posts from Subreddits a user follows.
Recommended: Posts Reddit’s algorithm suggests.
Promoted: Advertisements.
Reddit’s other main product, the Subreddit Homepage, has a different strategy. While Subreddits display posts in a similar verticalized ranking mechanism, Reddit solely distributes organic (posts generated in that Subreddit community) and promoted (advertisements) content types.
Because Subreddit communities exist as highly autonomous, walled-off networks and are governed by Mods with significant stakeholder power, Reddit doesn’t attempt to display Recommended content from other Subreddit communities that may be viewed as competitive.
Instead, Reddit uses this strategy to slightly increase the frequency by which it distributes advertisements, doing so at a rate of 17% (17 ads per 100 posts) compared to 15% (15 ads per 100 posts) on the Homepage.
Reddit’s Advertising Story
Reddit’s push into advertising has been transformative. Since its IPO in March 2024, the platform has outperformed Meta in stock performance and reported its first profitable quarter in nearly 20 years. Advertising revenue grew by 68% year-over-year, reaching $315.1 million in Q3 2024.
In Q3 2024, Reddit’s advertising revenue grew to $315.1 million, while “other” revenue reached $33.2 million on account of “data licensing agreements signed earlier this year.” Both Google and OpenAI have cut deals with Reddit to train their AI models on its posts.
Part of Reddit’s appeal to advertisers is its unique user base. According to Comscore data for the fourth quarter 2023, of those who visited Reddit in the United States, 32% were not active on Facebook, 37% were not active on Instagram, 73% were not active on Snapchat, and 41% were not active on TikTok.
While Reddit markets 10 different types of ad products that vary based on format (image, video, carousel, AMA, etc.), in reality, it’s ad platform can be distilled down to two products:
Brand Marketing: Top-of-funnel ads focused on brand awareness that may or may not have a natively integrated “Learn More” call to action that directs users to a third party location.
Direct Response: Lower-in-the-funnel ads focused on conversion that have a natively-integrated call to action (“Shop Now”, “Sign Up”, “Order Now”, etc.) requesting that a user converts on a third party location.
As reported by Modern Retail in June, Reddit is actively trying to position itself as a more affordable, lower-funnel ad platform.
I recorded 21 subsequent ads on my Reddit Home and the Subreddits r/Dataisbeautiful and r/Skincareaddiction1 to analyze the frequency by which these ads are shown and the effectiveness of Reddit’s lower-funnel positioning.
As we can see, the vast majority of advertisers leverage Reddit for higher-funnel brand awareness. Interestingly, Direct Response ads, the more profitable of the two formats, were shown at a higher frequency rate in the Homepage than at the Subreddit level, even though Subreddits offer a more precise audience who self-select based on shared interests.
Still, Reddit is still used largely as a top-of-funnel ad platform.
Moreover, to approximate Reddit’s ad targeting efficacy, I recorded each advertiser and their respective industry.
An analysis of ad placements reveals that pharmaceutical and healthcare companies dominate Reddit’s ad inventory, often using the platform for broad awareness campaigns rather than precise targeting.
Indeed, a large use case of Reddit’s advertising appears to be brand awareness for pharmaceutical products targeting either weight loss, skin conditions or hair loss. These strategies do not take advantage of the hyper-personalized and targeted nature of digital marketing, but view Reddit as a broadcast channel, much like cable TV, to get in front of eyeballs, regardless of their relevance.
The above ad, for example, was shown to me in r/dataisbeautiful and is not relevant to any of my behavior on the platform or the r/dataisbeautiful Subreddit. Worse, the ad is a 1:43 minutes of mind-numbing scrolling through the safety information for the drug.
Further analysis reveals Reddit’s inadequacy. For both r/skincareaddiction and r/dataisbeautiful, I refreshed my page six times and took a screenshot of the ad I was serviced in the first inventory slot (third post from the top). As you can see below, the ads varied greatly, promoting products and services from a random cohort of industries that have little relevance to my user profile or the Subreddit community I engage in.
Despite its growth, Reddit’s ad ecosystem faces challenges. While it offers a range of ad formats—from carousel ads to Ask Me Anything (AMA) integrations—execution often misses the mark. For instance, many ads lack relevance to the Subreddit or user viewing them, undermining the hyper-targeted nature that digital marketing promises.
Outlook: Can Reddit Monetize Its Unique Ecosystem?
This disconnect highlights a significant opportunity for Reddit to improve ad targeting. By leveraging the explicit interests expressed through Subreddit memberships, Reddit could deliver more relevant ads, improving user experience and advertiser ROI.
While Reddit has to balance the difficulty of anonymity and the friction it presents to creating personas, it benefits from the self-selecting nature of Subreddits to learn users explicit interests and hyper-personalize advertising. This should increase ad efficacy and allow Reddit to offer competitive pricing based on conversion events rather than just reach (CPMs).
Second, Reddit still has ample room increase its advertisement frequency throughout its products, especially if the ads are more aligned with the users interest. Reddit services almost 50% less advertisements per 100 posts than Instagram.
In sum, Reddit’s unique structure presents both opportunities and challenges in its quest for monetization. Key areas of focus include:
Enhanced Targeting: By leveraging Subreddit memberships more effectively, Reddit could deliver ads aligned with users’ explicit interests, improving relevance and engagement.
Increased Ad Inventory: With only 15 ads per 100 posts on the homepage, Reddit has significant room to expand ad placements without alienating users.
New Ad Formats: Exploring innovative ad formats that align with Reddit’s conversational ethos—such as community-driven polls or reward-based promotions—could unlock additional revenue streams.
Balancing Anonymity and Data: Developing ways to respect user anonymity while gathering actionable insights will be crucial for long-term success.
Closing Thoughts
Reddit’s evolution from a niche community forum to a major advertising platform reflects the broader tensions shaping the internet today. Its decentralized, user-driven model fosters unparalleled communities but complicates traditional monetization strategies.
To succeed, Reddit must navigate these challenges without alienating its core user base. By aligning its advertising strategy with its community-first ethos, Reddit has the potential to redefine digital marketing, offering a model that prioritizes relevance, discovery, and user engagement.
As Reddit CEO Steve Huffman aptly noted, “Reddit’s influence continues to grow across the broader internet.” In 2024, Reddit was the sixth most Googled term in the U.S., underscoring its role as a destination for answers, advice, and community. The question now is whether Reddit can preserve its distinct culture while unlocking its full economic potential—a delicate balance that will shape the future of community-driven platforms.
Both Subreddits had the same distribution frequency.