Snapchat is a super creative App. The way they monetise with non-core features is very helpful for any App developer.
No doubt, the Snapchat developers are great. But when CEO Evan Spiegel talks about the Snapchat App, it is always full of business model terminology that you may not even pick up if you don’t know that there is a whole theory behind each of those individuals words and terms.
Our articles and products are MBA-level content that can give you an initial understanding of the business model of the most successful Apps without having to do a business degree.
Before (or at least in parallel) to developing your App, understand the business model that underpins the most successful Apps. Many of them are based on the platform business model which I have covered them in great depth: Google, Facebook, Twitter, Pinterest, Uber, Airbnb, Booking.com, TripAdvisor, Expedia, Groupon, Yelp, Amazon, Amazon Prime TV, Amazon Kindle, Netflix.
Snapchat is one of those wonderful examples to learn from.
Deep rooted needs …
The way Snapchat grew is opposite to the way other social media platforms attracted users. They decided that a defining feature of their app is to let the content disappear after 24 hours. A surprising move when you consider that one of the key value propositions of Facebook, Instagram and other platforms is to keep your photos and organise them as albums. And they hit home with this in a number of ways. First and foremost, it resembles real-life and communication: moments are temporary and they go by. All they leave behind may be a trace in our memories that will fade later or – in most cases – sooner. And this attracted not those vulgar moments that many predicted it would. MySpace, who had more daily traffic than Google in their early days went under due to the negative effects of frivolous content, harassment and other forms of negative interactions.
A similar fate was predicted for Snapchat. But it never happened! The disappearing feature, in fact, emphasised spontaneity and “living in the moment”. It further negated the need to “keeping up with the Joneses” that you can frequently observe on Facebook where people envy the great moment their friends share just to aim to trump them at the next opportunity. Disappearing moments resonated in particular with a young demographic, the 13-24 year old. It may create a sense of equality among the non-haves. And it walled them from the unwanted observation/supervision: photos disappeared before parents eventually discovered them. Thus it provided privacy (not necessarily from strangers, but oddly, from those you know!).
After parents had followed their kids onto Facebook, the kids needed a new hideout – what’s more uncool than being where your parents are? What could resemble the needs of a teenager more? That is how Snapchat started and it scaled fast and large. Any business that wanted to target these demographics soon knew where to go. Facebook (and subsidiaries Instagram, Facebook Messenger, WhatsApp, Threads) have taken on Snapchat in copying successful features quickly. This is one of the reasons why Snapchat has been one of the most innovative platforms around.
The vision and what they stand for
“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. Our products empower people to
- express themselves,
- live in the moment,
- learn about the world, and
- have fun together.
In the way that the flashing cursor became the starting point for most products on desktop computers, we believe that the camera screen will be the starting point for most products on smartphones. This is because images created by smartphone cameras contain more context and richer information than other forms of input like text entered on a keyboard. This means that we are willing to take risks in an attempt to create innovative and different camera products that are better able to reflect and improve our life experiences.” IPO document [formatting added]
“We generate substantially all of our revenue through:
- the sale of our advertising products, which include Snap Ads and Sponsored Creative Tools, and measurement services, referred to as advertising revenue.
- Snap Ads may be subject to revenue sharing arrangements between us and the content partner.
- We also generate revenue from sales of our hardware product, Spectacles. This revenue is reported net of allowances for returns.”
Monetisation models & buying types
Though it may look like it’s structured a bit differently, essentially it contains the typical monetisation models that we know (CPM, CPA/CPC)
- Auction: Goal Based Bidding (GBB) allows advertisers to bid on a goals, like impressions, website traffic, installs, swipes, video views, etc. Snap will aim to optimise for the goal at the lowest cost. While goals are typically charged as Cost per Action (CPA), it will be charged at cost per impression (CPM) as a minimum
- Reach & frequency (programmatic): Allows to present the ads to the targeted audience in a certain frequency (e.g. 3 times per week for 5 weeks). It is known from traditional advertising that frequency is important for the effectiveness of ads. Now, this is obviously better achievable with an app where people have a unique log ID than with offline ads
- Revenue by buying type: Snap Inc makes the majority of their revenue through the reach & frequency buying type.
Revenue by geography
Snap Inc has launched international expansion in many countries. Last time, you have seen Pinterest with a staggered launch into West European countries. Snap is expanding into many countries as one. Their CEO states the importance to build network effects fast to have “moat”. Snapchat’s Android version has been quite a success in India and some other developing economies.
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As always with platform business models, we need to think about the value proposition to all sides of our multi-sided platform.
Value proposition for Snapchatters (users)
- Fastest way to communicate: As Evan Spiegel points out, Snapchat vore value proposition is to be the fastest way to communicate and that is best done with photos
- Express themselves: A photo can express emotions and moments better than text-based communication. This can be augmented further through the tons of features that are built into the app (filters, lenses, text, photo edit features)
- Living in the moment: Deletion by default allows users to take a photo in the moment without needing to look good or think about how to pose for the photo, etc
- Learn about the world: The Discover feature has tons of user- and professionally-generated content. The Snapchat Map organises friends and content in a geographical way
- Have fun together: Chat and other interaction features, sending short videos, group chat, bitmoji, play games, following on the map and more
- Tell stories: Snapchat introduced My Story – this feature has now been copied by basically all social media apps. Snapchat was probably the first app that sorted pictures from the same event in chronological order, whereas other apps always showed the last posted photos first, e.g. on a wedding you would see the last photos (where probably everybody is drunk) first. On Snapchat, you will see the early photos first. Also, friends that are at the same event can all contribute to the story (Our Story)
- Memories: While deletion is default, the app allows people to curate their own (and their friend’s) photos in the Memories section (though most users will probably not use Snapchat as their photo album app)
- Entertainment: A large and growing amount of content created by users and professionals often well-suited to provide ideas and inspiration around things to
- Made for mobile: Snapchat is one of the most stringent apps in terms of having everything in the vertical format including their Snap Original Shows
Value proposition for businesses
- Customer segments: Snapchat has high penetration in the 13-24 year-old demographic. Advertising on Snapchat is an opportunity for many businesses to reach this audience
- Native integration: Snap is doing a good job in integrating ads quite natively into their product. Ads can be part of the Discover function, Commercials part of shows and Geofilters are available at appropriate locations, such as in-store just to name a few examples. Native integration typically translates to higher click-through rates, engagement, retention and conversion
- Non-interrupt: The app is often being used when people are in a more relaxed mindset. This makes the ads less interruptive than say people seeing an ad while trying to work or study. On a spectrum from high to low-interruption marketing, Snapchat probably sits at the lower end of the spectrum. This is also supported by the fact that engagement metrics are very high and still rising
- Word-of-mouth: The app has many features to support spreading of ads from user to user. Photos taken with advertising lenses and filters can spread widely when they are perceived as fun
- Business tools: I will cover in a moment the functionality of the advertising tools and features which is what the businesses are there for. While not as extensive as the big platforms, there is definitively a fast-growing set of ad tools and features
- Self-serving tools: Most of the advertising features can be self-served which is a win-win for Snap and advertisers. The downside, however, is that the risk of bad ads, such as clickbait, gets heightened. My observation is that Snap really needs to work on this by putting respective checks in place. The risk is further augmented by the young age / susceptibility of the users
- Ecommerce tools: with product catalogues and shopping features, Snap is definitely making early in-roads into the world of ecommerce
- APIs: Snap Kit offers various ways of integration to various types of businesses (more in our presentation) and creates an ecosystem of interfacing apps
- Users: A majority of the content (photos or “Snaps”) is created by the users who share it among each other. It’s this that fuels the platform. One of the reasons why people use Snapchat instead of the in-built camera and SMS is because it makes it easier for them to communicate via photos
- Content creators: The Discover platform is a crucial part of the Snapchat app. It hosts content from many non-, semi- and professional content creators, e.g.:
- Influencers: individuals who amass very large follower bases (friends)
- Media outlets: TV channels like NBC and others partner with Snap to bring their content onto the platforms and often adapt format and style. Some of these help with curating Our Stories, etc and Snap has revenue sharing agreements with some
- Magazines, websites: print and online magazines, travel sites, tabloids, etc
- And many others
- Advertisers: some of these content creators are also running ads. But most advertisers don’t regularly create content on Snapchat. They buy ads and typically have Snapchat-tailored ad creatives. Some of these are more traditional, like a short commercial, other very creative, such as (geo-)filters, lenses, etc
- Ad technology & agency partners:
- A very large amount of ad partners (mostly agencies)
- 3rd party tracking partners, e.g. Google, Shopify, BigCommerce and others
- Target audiences and tracking: comScore, Nielsen, Oracle. This includes efforts target audiences and to track offline (in-store) sales impact attributable to ads shown on Snapchat (in ways that are said to be more privacy compliant than online tracking methods). More on this interesting topic here and here
- Technology / developers: many third-party apps have started partnering with Snap by using the SnapKit – the API. There are several ways and many partners to integrate
- Apps can use the Snap CreativeKit to share relevant things with the user Snapchat friends, e.g. high scores, music (e.g. Pandora), achievements and moments, etc
- And there are various ways to use content or data from Snapchat in 3rd-party aps, e.g. using Snapchat for login, using the user’s personal Bitmoji or sharing Snapchat stories
- While partners have to go through an approval process, SnapKit is still quite new and opens many opportunities for technology partnerships
- More in the detailed report
Snap’s key activities revolve around engaging existing users and adding new users to create strong network effects. In developed markets this happens by climbing up the age demographic. In new markets users can come from any demographic.
- Growing the user base in the US and internationally. This is important for any of these platforms. Their share price and cost of capital is strongly based on growth assumptions. But it is even more important for Snap given that they are cash and earnings negative. Less available capital will hamper their innovation endeavour, which as we will see in a moment, is actually key to growth. Snap Inc had large capital injections from private investors after their IPO confirm their need for outside capital
- Engaging the users is mission-critical for Snapchat. Two of the most important ways are innovation (new functionality and features) and content
- Innovate: This brings us to innovation. Snap brings a real flurry of innovations and improvements out. Snap centres all their innovations around their app (whereas Google and Facebook diversify their innovation efforts onto many areas that have little to do with their core). The ideal innovations combine engagement users with native incorporation of ads (or other monetisation. Instagram, WhatApp, Threads and even Facebook Messenger are pretty openly imitating functionality that made Snapchat big. And that is why we see Snap innovating at a remarkable pace
- Grow content: Content has become an important pillar to keep users coming back and hooked on the app. In 2018, they have partnered with 20 companies who will help with the curation of content and in return receive a revenue share from the associated ad revenues (I will cover the content part more in the key resources section
- Improve the app, website, UI/UX principles and technology assets. Snap is always aiming to reduce friction. But sometimes this also backfires as it did in 2018 where changes to the UI backfired and led to loss of users (there are very valuable learnings from his episode that we will drill into later)
- Improve algorithms, e.g. in order to present personalised content based on the content the user has shown interest in
- Growing the number of companies and influencers on Snapchat in support of good/engaging content
- Snap is growing in terms of demographics (countries, age brackets, etc). One of the tasks will be to make sure there is a critical mass of relevant content addition by customer segment. Unlike search platforms, it is crucial for the Discover feature to have a constant stream of new content
- Snap’s sales team focuses on the large advertisers and relies on their ad partner to manage the medium/smaller ones. Many of the smaller firms will also use the (self-serve) tools
- Marketing via organic and paid traffic across various channels, such as Google Ads. Organic growth through word-of-mouth has played a big role in Snapchats success
Filters are one of the different features where we can find a good alignment of user features with m monetisation opportunities. Sponsored filters, as in this case for McDonalds, cost upwards of $500,000/day with millions of users seeing these. It is natively embedded which typically translates to good marketing return on investment
Key Resources / Assets
The master resource (or asset) of any platform are its network effects. It is the resource/asset that needs to be built and nurtured. Here is how this translates into more detail.
- Content assets:
- Snaps: (i.e. photos) that the users share: 3.5 billion per day!
- Lenses: Lenses are photo overlays and can be created by user or be sponsored by firms (i.e. for marketing perspective)
- Filters / geofilters: Anone (including advertisers) can create geofilters. They come at a cost that depends on location, time, duration of the geo-filter
- Shows: Shows, news, sports, etc that you can also find on other platforms
- Snap Originals: Shows exclusive to Snapchat and created in vertical, fast-paced formats
- Professionally curated stories by CNN, Cosmopolitan, Daily Mail, NBC News, NBC Sports, NBC, Today Show, New York Post and many others (published in Discover/ Our Stories)
- Subscription content: can be vlogs, shows, and other content
- Users (Snapchatters):
- 210m+ DAUs (daily active users) as of Q3 ‘19
- Relationship to advertisers ranging from small/medium size businesses to large multinational brands
- The Snap(chat) brand: Snap has built a brand that stands for their core value propositions and ranks high among social media brands
- The App, the technology / digital assets
- The app (4.3-stars on Google Store, 3.9-stars on iTunes App Store) with all its features and ongoing innovations
- The website is of more interest for businesses as Snap does not offer a website version of their app functionality
- Total team size: ~2,884 employees as of 31/12/19
- Largest teams: Engineering and Sales & Marketing
- Intellectual property:
- As of December 31, 2018, we had 436 issued patents and approximately 722 filed patent applications in the United States and foreign countries relating to our camera platform and other technologies
- Goodwill / intangible assets as per their 2018 annual report
- Acquisitions are always a great insight into the capabilities a company wants to gain. Here are more details that I have created for you. Check it out to see a direct link to the functionalities that have been added to their app with the acquisition. Snapchat has been using acquisitions as an important way to improve the customer value proposition. In our in-depth report you will find all acquisitions with brief description. But more importantly we will look in detail into 3 examples – 2 very successful ones and one that was rolled back. There is a lot to learn from these examples.
- The technology stack
(We are looking at this from the lens of the underlying needs, how they are served and the things that affect customer relationships. There is a natural overlap with the value proposition)
Relationships to users
In 2017, Snap brought innovations to their app that caused a backlash. The reverberations could be observed across many metrics. One of them was their brand scores. In an important survey in mid 2018, Snapchat did poorly (so did other social platforms which were embroiled in other issues):
“In fact, social media brands ranked pretty poorly overall. Instagram ranked 152nd, Facebook 211th and Snapchat 215th Another interesting nugget is that millennials showed huge drops from Facebook (-21), Snap (-44), and Instagram (-31),” Scott Davis, chief growth officer at Prophet, tells CNBC Make It. “Non-millennials showed an even higher drop in relevance for Facebook (-45), though a slight gain for Snap (+12).” Brand Relevance Index
Here is another survey elaborates more on the link between the controversial redesign and the slump in brand perception. It shows how changes (and how changes are being rolled-out) can affect a brand
“Since Snapchat began rolling out its controversial redesign late last year, the app’s Impression score — which asks consumers if they have an overall positive or negative impression of a specific brand — has tumbled from a high of 30 in late January to a low of 8 in early April with young Americans aged 18-34, according to data from YouGov BrandIndex. Indeed, the 73% decrease has essentially wiped out all the positive consumer sentiment Snapchat has gradually built since the beginning of 2016.”
Snap did well in a more recent study in 2019. The survey was exploring the level of trust in comparison with other social platforms (not all brands). It is important to note a correlation between trust and ad efficiency.
“New data suggests that social media users are more receptive to ads on platforms that have high digital trust. When users feel a platform is prioritizing their interests, they’re likely to engage more authentically and perceive that environment as trustworthy. Brands that create compelling campaigns on trusted platforms can both avoid brand-safety issues and also receive more positive engagement from audiences.” Business Insider
More broadly (and prior to the redesign), Snap’s relationship to its users is defined by its fun, positive and non-competing interactions in-the-moment among its users:
Bayer and colleagues also investigated what aspects of Snapchat use might cause the increased emotional reward. Their findings suggest that reduced “self-presentational” concerns are a major reason, such as not worrying if shared pictures seem ugly or conceited. “Since Facebook has become a space for sharing crafted big moments such as babies, graduations and birthdays, Snapchat seems to provide users with a distinct space for sharing the small moments,” said Bayer, a doctoral candidate in the Department of Communication Studies whose research focuses on communication technologies. University of Michigan
Lastly, one study commissioned by Snap shows the prevailing emotions when using Snapchat and other apps.
Relationships to advertisers
Advertisers will, of course, adjust their perception largely with financial metrics. In one of the largest (probably the largest, covering >1.5b ad spend), Snap demonstrated great success:
“Big new player Brands love Snapchat. Snap hit #3 for non-gaming categories in both iOS and Android after not making the list at all last year on Android.” Singular ROI Index
In general terms, the relationships to advertisers are:
- Self-serving: Advertisers can use the business tools and largely create, experiment with and see the results in self-serving ways
- Partner support model: Another way to get ads set up and going is via the many ad support partners
- Direct support model: large advertiser can get support from Snap’s team on augmented reality lenses
- Ability to connect with users directly and fun ways
Customer relationships are incredibly important for platform businesses. Platform businesses work and scale well due to indirect network effects. Customer relationships can enhance or dampen these effects which can bullwhip into strong positive or negative effects as we have seen in the survey results.
Snap has taken a deliberate hit to their relationships with their influencers when they rolled out the redesign which put their content into a less prominent location. Snap was aware of this (as we will see later) and has accepted it.
The relationships to the wider stakeholders are also important, even non-users (e.g. parents, teachers). In the early days, Snapchat was suspected to be used for vulgarities. Further, the stories of all sorts of risks (cyberbullying, harressment, etc) need to be managed diligently, esp on a platform whose users are so young. Another area to watch are political ads which Snap does not prohibit (unlike Pinterest and recently Twitter). But they have clear rules around it.
Snap encourages their staff to “give back” to the community “Our giving programs focus around three key pillars: empowering youth, education, and the arts. We volunteer thousands of hours every year through Snap CAMP (Community, Arts, and Mentorship Projects).”
The Snap Foundation aims to support arts and education (though it seems to be still in the research phase. “Our mission is to develop pathways to the creative economy for underrepresented youth in Los Angeles.”
The two co-founders hold over 96% of the voting rights which make them susceptible to criticism if things (read: share price) do not go well. The DOJ and SEC closed an investigation finding that Snap had sufficiently warned investors in their IPO document about the risks. We have gotten used to the fact that every time an IPO does not perform, someone starts a lawsuit.
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Most transactions on the user side are automated through the app/website
Transaction, interaction and advertising channels:
- The App
- The website is more directed towards partners than users
- App stores organic and ads
- Notifications in-app, esp when receiving message/photos from friends or subscriptions
- Social media pages: Not surprisingly, you don’t see them on Facebook (And also not Pinterest but for other reasons)
- Facebook: N/A, not using as they are the main competitor
- Twitter: 2.2m followers, (potential) users, slogan “real friends”
- LinkedIn: 175k followers, reaching out to talent and influencers
- YouTube: 230k subscribers, (potential) users, slogan “real friends”. Here they are using stories of real Snapchat users.
- User support: largely automated and/or help pages
- Advertising: paid advertising, esp Google Ads
- Word-of-mouth and organic spread
- Discover function is a channel in itself for professional and non-professional content
- Business advertising tools (see value proposition)
- Sales team with a tiered support model, esp for large advertisers
- Business and resource pages:
- There is no Snap(chat) business app at this stage
- Interestingly, Snap does not have an engineering blog like many others do to attract talent
- Classic geo-demographic segments
- 210m Daily Active Users
- 69% of 13-17 year olds use Snapchat and 65% of 18-24 year olds in the US, these is their key demographics
- More urban; balanced in gender and medium income
- Strong / fast-growing in a number of markets:
- US, India, Brazil, France
- Behavioural, based on large amount of user data collected, e.g.:
- Most frequent contacts (“best friend”)
- Geographic data (e.g. geofilters, SnapMap)
- Actions taken
- See more under key resources >> user data
- Behavioural, based on interest data
- Interests via subscriptions and content watched
- Via their partnerships with, e.g. Nielsen (~30,000 segments)
- See the targeting options in our resources
The big game are the micro segments (which allow targeted ads). These segments can be used by advertisers. The most valuable audiences will attract the highest ad costs (in bidding and programmatic modes).
Businesses are also being segmented. This can happen in many ways as well. Snap has organised their marketing teams around verticals. Further, they distinguish in their support model between large advertisers and non-large. More, importantly with the data that they are capturing they can – over time – segment in many different ways.
- By business size:
- Global brands (they have a new team that focuses on this)
- Large brands
- Small, medium size companies
- By vertical:
- Their teams distinguish (at least) around: Retail, tech, CPG, Restaurants, Tech, Entertainment, Auto
- In their business blog they address: Public services, financial services, consumer goods (CPG), travel, restaurants, media & entertainment, gaming, retail, autos, telco, ecommerce, tech
- By interest targeted:
- They may segment based on which interests advertisers target within the advertising tools and match this against verticals
- By geography
- They distinguish at least by geographies that they serve (see revenue section)
- You can also check on the careers page where they have offices which means they believe in growth in those areas (e.g. Western Europe, Scandinavia, Ukraine, Middle East, India, China)
- Business types:
- Partners, e.g.app developers
- Users of the various APIs under SnapKit
- Game developers
- Publishers, e.g. of content on their Discover pages, further divided into the type of content, etc
- And more
- Cost of Revenue
- Research and Development Expenses
- Sales and Marketing Expenses
- General and Administrative
Snapchat is a super interesting business – even for someone that is not their key demographic, like myself – in that they have really innovative monetisation features and a really, really long list of continuous innovations. That is the reason why Facebook still has not managed to get them down despite many years of attacks. Get the additional resources that I am offering and boost your innovation and business management knowledge …