How Snapchat Makes Money
Snapchat is losing users, but its ad prices are finally on the rise.
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By JAKOB ECKSTEIN
Updated Sep 24, 2019
Snapchat started as Evan Spiegel’s final project for a product design class at Stanford in 2011. The founder and CEO pitched a mobile app that permanently deletes photos and texts after opening them. His classmates thought it was a terrible idea. Now, eight years later, Snapchat—the company's official name is Snap Inc. (SNAP)—has become one of the hottest social media apps, the kind that feels comfortable turning down a $3 billion offer from Facebook (FB).
Snap went public in March 2017 with a market cap of $17 billion, which it pushed to $24.7 billion at $24 a share during its first day of trading. This bombshell IPO earned Spiegel 37 million shares in Snap stock, worth $637 million at the time, making him the best-paid CEO of 2017.
Despite its initial success, however, Snap has had a tough time since its IPO. The problems have been many, but they generally stem from Snapchat’s failure to grow its user base as quickly as investors were betting it would. Growth has steadily declined since 2016, and the app actually lost two million and one million daily active users “DAU” in Q3 and Q4 of 2018, respectively. And while Snap’s stock is again on the rise, the company’s future is still uncertain.
In Feb. 2019, when Snap released its 10-K and annual report, it had a market cap of $9.7 billion—up from a low of $5 billion in December, but about 60% less than its $24 billion in March 2017. Snap has a return on equity (ROE) of -48.24% and a current ratio of 4.7.
Snap's Business Model
Snap calls itself “a camera company.” It’s not. Like other social media giants, it’s an advertising company. According to Snap’s annual report, 99% of its revenues came from advertising last year. (The other 1% came from Spectacles, sunglasses with built-in cameras that sync with Snapchat. They are Snap’s only hardware product.)
KEY TAKEAWAYS
Like Facebook and Instagram, Snap sells ad space on its social media platform; Snapchat.
Since its IPO in March 2017, Snap’s market cap fell over 60% by the end of 2018. It is now rising again.
Snapchat’s average revenue per user (ARPU) has increased 37% to $2.09 in Q4 2018, compared to $1.53 in Q4 2017.
Snapchat’s Core Features
Snap sells ad space on Snapchat, making it impossible for users to avoid exposure to ads if they wish to use the app. To understand how advertising on Snapchat works, it is necessary to first understand Snapchat’s features.
The “Friends Page” is where Snapchat’s core function resides; the one Spiegel first pitched at Stanford in 2011. Users can send their friends “Snaps”—photos, videos, or text messages that disappear after they are opened and viewed once. Individual videos can be up to 10 seconds long and can be strung together infinitely.
With “Stories” users can broadcast Snaps for 24 hours (after which they disappear) to either their Friends or anyone who finds their profile, depending on a user’s privacy settings.
The “Discover Page" (referred to internally as simply "Discover") is situated beneath the horizontally oriented Stories feed, the Discover Page is a feed of popular stories and content created specifically for Snapchat. This content is uploaded by influencers, advertisers, or partnered media companies—like CNN, ESPN, or E!. Snapchat’s algorithms curate this content for individual users based on their locations and preferences.
The “Snap Map” is a live, geographical representation of Snapchat activity. It shows users popular Stories near them and where their Friends are. Users can opt out of being visible to others on the Snap Map.
Sponsored Lenses
These are animated, interactive augmented reality filters (meaning animated graphics that respond to users’ facial movements) that users can lay over their Snaps and Stories. Brands can buy Sponsored Lenses that include messages they want users to see. For example, a film studio might advertise an upcoming superhero movie by purchasing a Sponsored Lens that makes users look like characters from the film. Users can then take selfies and videos with this Sponsored Lens and send them to their Friends or publish them to their Stories.
Snap Ads
This product allows advertisers to use Snapchat’s Stories feature like users do. Users are shown these Snap Ads when they flip through their Friends’ Stories, when they browse the Snap Map, or when they scroll through the Discover Page. Snap Ads stay live for more than 24 hours, can be longer than user-generated Stories, and can include interactive software and download links.
Original Content Commercials
In October of last year, Snapchat announced a new lineup of 12 original shows with four to five minute episodes it calls “Snap Originals.” These shows, which users can find on the Discover Page, are created especially for consumption on vertical smartphone screens and include six-second, unskippable ads that appear a few times per episode.
Snap Games
In April, Snapchat launched an in-app gaming platform akin to Facebook’s. The games are free for users to play. Advertisers can buy ads that are shown when a user opens a game and periodically during lulls in gameplay.
How Advertisers buy Ads on Snapchat
For Snap’s first few years, advertisers purchased Sponsored Lenses and Snap Ads through a personalized direct-sales ad team. Then, in June 2017, Snapchat began automating the process. Now, advertisers can buy Snap Ads and Sponsored Lenses through a series of self-serve tools. Businesses of all sizes can use these tools to buy, optimize, and manage their ads. Snap also offers analytics with these tools.
Ad Pricing
Since its introduction of Sponsored Lenses in 2015, Snap’s ad pricing has been all over the place. For the first year, Sponsored Lenses cost between $300,000 and $500,000, and Snap Ads a whopping $750,000. These were huge sums to charge for access to a platform that was difficult for advertisers to understand and that demanded specially made content that was often impossible to reuse elsewhere.
