The Snapchat Business Model In A Nutshell

Snapchat is a camera company, which business model moves across three industries: social media, content marketing, and AR. Snapchat generates most of its revenue from several ad formats (AR Ads, Snap Ads, Sponsored Geolifters, and Sponsored Lenses). The company also produces Spectacles, a set of AR glasses enabling content creators to produce interactive experiences through Snapchat. 

Origin story

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The initial traction of Snapchat (Source Snap financials).

Back in 2008, Evan Spiegel met Reggie Brown, during the freshman year. The same year they joined together the Kappa Sigma fraternity house of Stanford. There they met Bobby Murphy. In the spring of 2011 Reggie had this idea – how cool would this be – if the photos he was sending to a girl would soon disappear. That is how in 2011 the idea behind Snapchat was born. The three young men put together an app which at the time it was called Pictaboo:

pictaboo-snapchat

Sourcetechcrunch.com

By the end of the summer, the app only had 127 users! The name was changed in Snapchat in the fall of 2011. However, the app soon started to get tracion.

In less than a year, by the spring of 2012, Snapchat had 100,000 users. The first investment arrived in April 2012, when a venture capital firm made its first seed investment by valuing the company at $4.25 million.

By the spring of 2013 more than 60 million snaps were sent each day. The pace of growth accelerated in June 2013 the valuation of the company (after other two investment rounds) grew to $800 million. Snapchat added new features (like Snapchat stories) which made the company grow even faster.

The incredible thing about this story is that Mark Zuckerberg is reported to have offered $3 billion to acquire Snapchat,  although at the time the company didn’t turn a dollar in revenue.

In December 2013 the company valuation reached $2 billion. By the same time, Snapchat had over 4.6 million users. Finally, on June 2015, Snapchat came up with the first monetization strategy. The uses of Geofilters to allow businesses to brand themselves through advertising.

Just like Google allows businesses to bet on keywords. Businesses can create their Geofilters based on location and track the results of those Ggeofilters.

snapchat-data

Sourceblog.bufferapp.com

By March 2017, the company IPOed, closing the first day of trading with a 44%, valuing the company at $33 billion. 

Since its inception, Snapchat has been a very innovative player in the social media space. If at all, Mark Zuckerberg tried to acquire Snapchat over the years, but Facebook was turned down more than once.

This eventually led to Facebook copying many of Snapchat’s features (among the most successful ones was Stories) in its other products, like Instagram. 

Indeed, if we look at Snapchat product development, the company already looked into innovative products, like spectacles, back in 2017.

As they pointed out at the time “Our latest effort to reinvent the camera is Spectacles, our sunglasses that make Snaps. Spectacles connect seamlessly with Snapchat and are the best way to make Memories because they capture video from a human perspective. For example, the wide-angle lens is designed to mimic the way the human eye sees the world so that viewing a Memory later makes a person feel like they are reliving the experience.”

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Source: Snapchat Prospectus

As further explained: 

Spectacles capture everything the lens sees using our Circular Video format, which can later be viewed in full screen on any device, in any orientation. Circular Video represents the evolution of our thinking around mobile video and the progression beyond our first vertical video format.

As of 2021, Snapchat is already working on its new generation of Spectacles: 

For the company to manufacture a device that enables creators to directly build content on the platform is critical for both distribution and growth of its digital advertising segment. 

How does Snapchat work? 

The Snapchat interface is made of three main parts:

  • Snapchat application, the camera app to create snaps. 
  • Publishers Tools to publish Publisher Stories,
  • and Spectacles, which is the hardware part that enables creators to create Snaps. 

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Image Source: Snapchat Financials

The workflow is pretty straightforward.

The Snapchat app opens up directly the camera app on a smartphone. From there, it opens up the Snap lenses, through which it is possible to manipulate images, and create enhanced photos and augmented visualizations. 

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Image Source: Snapchat Financials

The lenses are really the creative tools, that enable creators to interact with reality, thus creating, interactive, and immersive content. 

From there, users can create Geofilters (pretty much local filters), and Bitmojis (cartoonized versions of users), which can be shared as snaps. 

Content can be created in two ways: 

  • Either through the mobile camera
  • Or through Spectacles  

How does Snapchat make money? Inside Snapchat’s Ad Formats

snapchat-business-model
The 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 story formats. In 2020, Snapchat made over $2.5 billion in revenues and over $950 million in net losses.

For a bit of context, by 2020, Snapchat generated $2.5 billion compared to $1.7 in 2019 on ads.

Snap Ads

As the company highlighted: 

When we first started experimenting with advertising, we decided to try placing Snaps created by advertisers in Stories. We thought this would be a good way to build a scalable advertising business because there are so many people watching billions of Snaps in Stories every day. Advertising in Stories made sense because it meant that our advertising partners had an opportunity to use sight, sound, and motion to tell a story about their brand and products.

How does Snap Ads placement work?

Snap Ads can be placed across various parts of a live, publisher, or user story

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Image Source: Snapchat Financials

To which they can also create attachments. 

Snap Ads formats comprise: 

  • Single Image or Video Ads.
  • Story Ads.
  • Collection Ads.
  • Dynamic Ads.
  • Commercials.

AR Ads & Sponsored Lenses

AR Ads can be served as Sponsored Lenses or Sponsored Filters.

Lenses are designed to offer augmented and 3D experiences.

In the sponsored lenses format, advertisers can provide branded Lens experiences by purchasing Sponsored Lenses, thus creating interactive Sponsored Experiences, where it’s possible to enhance and augment reality, thus providing AR ads as well. 

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Image Source: Snapchat Financials

In the Sponsored Geolifter format users can be targeted geographically by locations (from individual buildings to entire countries). 

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Image Source: Snapchat Financials

Snapchat’s angle? Investing in AR for creators

The angle that Snapchat takes when it comes to its target audience is to build tools for creators. 

One of the latest examples is the drone, which is a tool to enable creators to build incredible content:  

As per its latest financial reports, Snapchat is investing massively in AR experiences.

As the company highlighted “over 250 million Snapchatters engaged with augmented reality every day on average.” 

Indeed, the company has developed the Snapchat Lens Studio, which the company describes as “a powerful application designed for artists and developers to build augmented reality experiences for hundreds of millions of Snapchatters. With a huge set of built-in features including custom shaders and advanced tracking technology, the possibilities are endless.”

An example of a Snapchat experience, developed through the Lens Studio, enables developers, on top of the platform, to build custom experiences for millions of users on Snapchat.

Business resources: 

Case studies:

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