Dating apps have seen a falloff in user growth over the past few quarters, stoking investors’ concerns that the honeymoon may be over for the U.S. online dating industry. Fueling the view that the industry is simply becoming saturated, mature or over-monetized, the top dating apps reported slowing revenue growth in 2022 (the industry overall reported about $2.6 billion in revenue for the year) and tempered guidance for 2023.
However, investors who only pay attention to user growth may be looking for love in all the wrong places. "The market too often focuses on just user trends but misses the importance of monetization, which is likely the most important driver of revenue growth going forward," says Lauren Schenk, Morgan Stanley’s equity analyst covering small and mid-cap internet stocks.
Schenk says last year’s slowdown was likely due to poorly-executed monetization strategies and overall economic challenges rather than saturation. U.S.-based dating app companies that can convert users to paying customers could offer the best opportunities, and Schenk expects the leading online dating apps to deliver a 10% compound annual growth rate in revenue through the end of the decade.
Love at All Costs
Dating apps use a so-called freemium model, meaning the service and platform are free, but users can improve their experience and success rate by paying for either a monthly subscription of bundled features or one or more a la carte purchases. Currently, about 32% of the U.S. addressable single population uses online dating, and, of those, slightly more than a quarter pay.
“An increased push toward monetization would drive around 70% of revenue growth from 2022 to 2030, compared with 60% from 2014 to 2022,” says Schenk.
She estimates the industry monetization rate has doubled to about 26% over the past eight years and could grow to around 32% by 2030. Even small changes in the number of users paying for an app can have an outsized impact on revenue growth, Schenk says.
With strong free offerings, online dating has needed to up its game with compelling features to convert more users to payers. Going forward, brands could improve on their largely one-size-fits-all model for paid features by offering both lower-price options and additional premium options for users who are willing to pay more. For example, the dominant player in the online-dating space increased its global subscription rate by 81% between 2016 and 2021 with paid upgrades such as enhanced ways to show interest to prospective matches and the ability to preview individuals who have already “liked” the user.
Hoping to drive revenue-per-payer gains, brands are weighing a range of features, including higher subscription tiers; virtual gifts like digital flowers; and ultrapremium price points, including a $500-a-month plan, that would offer options such as 24/7 access to a dating coach. Currently, the average paying user spends between $18 and $19 per month on either subscriptions or a la carte purchases.
A focus on getting users who are already paying to increase their spending could be one tactic toward growth, as analysts believe the top 1% of dating spenders remain heavily undermonetized. Additionally, apps could target payers who can't afford monthly subscriptions or other premium features with more a la carte features or weekly subscriptions. Even the holdouts who prefer not to pay at all offer a large revenue opportunity via advertising.
A Dive into the Dating Pool
Analysts expect the annual growth in Internet-connected single people ages 18 to 65 to slow to about 1% over the next eight years, from 4% between 2011 to 2019. But as existing users age, they become more willing and able to pay for online dating. Meanwhile, the population of likely payers is growing as the net marriage rate continues to fall and Americans are waiting longer to get married, keeping them in the dating pool longer, says Schenk.
One potentially untapped demographic is fast-growing and wealthy. A 2019 Morgan Stanley survey showed that only 6% of singles 65 and older use online dating, compared with a relatively consistent 40% across the various 18-to-64 age subgroups. The number of 65+ singles is forecast to expand from 26.3 million in 2021 to 34.4 million in 2030, analysts say.
"Taking this all together, we think future U.S. demographic trends are more likely to drive monetization than user growth," says Schenk.
Bringing in people who have avoided or exited the wave of online dating over the last decade is another significant opportunity. Around 10% of Americans currently use online dating, 34% have used it in the past but aren’t currently, and 56% have never tried it, according to a September 2022 Morgan Stanley survey. Even in the age group most likely to have tried online dating—25- to 35-year-olds—38% have never done so. Looking at single people only, about 57% have never tried online dating, according to data from one of the top dating apps.
Improvements to the apps could attract new adopters or simply get people to return to online dating, and Schenk says brands could do more to reduce churn and retain more users.
Growing Pains
This shift away from simply adding users to monetizing them by innovating and executing new products and features is expected to usher in an era of growth volatility. "Volatility is emblematic of the opportunity,” says Schenk, but “it appears to expand the industry."
Companies would need to fine-tune their strategies and expenditures to find the right mix of offerings to help ramp up revenue. But once the industry emerges from this trial-and-error period, analysts expect durable, above-consensus growth over the medium to long term.
