snapchat-business-model

How Does Snapchat Make Money?

Snapchat revenue model is based on advertising. The company defined itself as a camera company, which enables users to generate content through its AR and stories formats. In 2020, Snapchat made over $2.5 billion in revenues, and over $950 million in net losses. 

Understanding Snapchat business model

Over the years, Snapchat had to adjust its business model to find its place in the market.

In its financials, by 2020, the company highlighted:

Snap Inc. is a camera company. We believe that reinventing the camera represents our greatest opportunity to improve the way that people live and communicate. We contribute to human progress by empowering people to express themselves, live in the moment, learn about the world, and have fun together.

The company’s key stakeholders

Advertisers

Most of Snapchat revenues are based on advertising, thus, making sure that the Snapchat ad platform attracts a growing number of advertisers is the key. Advertising products on Snapchat are made of two main products: 

  • AR ads, served as Sponsored Lenses or Sponsored Filters, to create immersive 3D experiences. 
  • And Snap Ads: where advertisers can use full screen videos with sound, in various formats (single image or video ads, story ads, collection ads, dynamic ads, and commercials). 

In addition to that, Snapchat provides advertisers with tools to track and improve the performance of their campaigns.

Community

as Snapchat defines itself as a camera company, but it sells primarily advertising, it’s critical that the platform keeps attracting a growing community of creators. In fact, creators make the platform compelling in the first place, as content attracts users, thus making the platform more valuable for advertisers, creating a positive loop or flywheel

And partners

Snapchat primarily depends upon the distirbution coming from Google, Apple, and Amazon to run its mobile app and and service. 

Snapchat flagship product is a camera application which enables people to communicate visually. While Snap’s format has now been adopted by most social platforms (through the so-called stories) Snapchat was among the first platforms who used “snaps” or online stories that got automatically deleted after 24 hours from their publication. 

This was critical to Snapchat, as this format drastically reduced the friction for users in creating content! 

Inside Snapchat product

Snapchat is made of a few key products:

  • Camera: Snapchat opens up directly the camera on the phone, enhancing it, to create various types of visuals. And also to have AR features in it. This is the starting point of the user’s journey. 
  • Communication: from there users can communmicate with each others, sending each other images and videos. They can also communicate via the personalized avatar tool, Bitmoji. 
  • Snap Map is an interactive feature, that enables Snapchat users to connect friends and see what they are up to in their local areas. Thus, enaling a sort of local social networking. 
  • Stories represent the core feature of the platform, or at least what gave it intial traction. In fact, this is made of a discovery tab where it’s possible to check all the content friends are producing over Snapchat. This idea would be copied by pretty much all other social media platforms. 
  • Spotlight is a sort of dedicated bacheca where the most interesting content is shared across various communities. 

Snapchat monetization strategy

Snapchat monetizes primarily through advertising. The advertising products include:

  • Snap Ads
  • and Sponsored Creative Tools (Sponsored Lenses and Sponsored Geofilters)

snapchat-revenues-2020

By 2020, Snapchat recorded over $2.5 billion in revenues, and over $950 million in net losses. 

Revenues are classified in two ways:

  • Advertising gets sold directly to advertisers, referred to as Snap-sold revenue
  • Certain partners that provide content on Snapchat, or content partners, also sell directly to advertisers, referred to as partner-sold revenue

Snap Ads, whether Snap-sold or partner-sold, may be subject to revenue sharing arrangements between Snapchat and the content partner.

What metrics does Snapchat use to assess its success?

Snapchat measures the progress of its advertising business using two key metrics

  • ARPU (average revenue per user) because it helps Snapchat understand the rate at which it is monetizing the daily user base. Snapchat defines ARPU as quarterly revenue divided by the average Daily Active Users. Average revenue per user, or ARPU, was $1.53 in the fourth quarter of 2017, compared to $1.05 in the fourth quarter of 2016, an increase of 46% year-over-year.
  • Snapchat defines a Daily Active User as a registered Snapchat user who opens the Snapchat application at least once during a defined 24-hour period. DAU or Daily Active Users, or DAUs, were 187 million in the fourth quarter of 2017, compared to 158 million in the fourth quarter of 2016, an increase of 28.8 million or 18% year-over-year.

Snapchat key metrics

As per its financial reports: 

  • Daily Active Users, or DAUs, increased to 265 million in Q4 2020, compared to 218 million in Q4 2019. 
  • Average revenue per user, or ARPU, increased 33% to $3.44 in Q4 2020, compared to $2.58 in Q4 2019.

Conclusions

The company has more than tripled its revenues from 2017. However, its operating income is still quite negative. In a digital marketing industry controlled primarily by the duopoly Google (Alphabet) and Facebook (Meta), Snapchat is stuck in the middle. Also, its distribution mainly depends on other platforms like Google, Apple, and Amazon. Therefore, the ability of the company to have a consumer AR product is crucial for its long-term success.

Read How Does WhatsApp Make Money? WhatsApp Business Model In A Nutshell

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