Snapchat Business Model: Here’s How the Company Makes Money

UTC by Osaemezu Ogwu · 7 min read
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Snapchat Business Model: Here’s How the Company Makes Money

At one time or the other, you may have used the popular social network Snapchat. If that’s the case, have you ever wondered how the company makes its money? Then let’s show you how Snapchat operates and generates its revenue.

Snap Inc. (NYSE: SNAP) is a social networking company that is best known for its smartphone camera application called Snapchat. The latter offers a seamless way for users of the platform to create short videos, chat, make video calls, exchange photos, amongst others. As such, users can share content with family and friends for free.

Snapchat business launch can be associated with the efforts of Bobby Murphy, Evan Spiegel, and Reggie Brown. In March 2020, the company reported it has 229 million active users each day and an average of over 4 billion Snaps were sent daily. The year also marked its tenth year anniversary given that it was launched in 2010.

Snapchat Sources of Income

Snap does not have business segments unlike companies like Facebook, Alphabet, etc. Nonetheless, Snap’s major source of income is selling advertisement space.

Given that billions of people troop in daily to use Snapchat, advertisers are always looking to advertise their products there. Thus, the money sourced from these advertisers helps to keep the application running while also making the business profitable. The funds can either be from Snap Ads or Sponsored Creative Tools.

Advertisers, by the way, have the ability to create longer videos and users can visit the advertiser’s website and install the promoter’s app.

In 2019, the revenue made from selling ads amounted to $1.7 billion and as such, it accounted for 98% of the revenue for that year. And in 2018, advertising revenue accounted for 99% of the funds generated for the year.

Asides from selling adverts space, Snap also revealed that it also sources for income from Spectacles. However, this revenue is considerably smaller than what advertising brings. Moreover, Spectacles is the company’s first physical product, and it enables users to create videos seamlessly.

Snapchat’s Performance in 2019-2020

Snap announced its earnings for the fourth quarter of 2019, and the first quarter of 2020. Here’s a breakdown of its earnings which will show you its performance from late 2019 to early 2020.

Q4 2019 Performance

In Q4 of 2019, the daily active users (DAUs) on Snapchat were 218 million and this marked a surge of 17% YoY. The revenue for the quarter was $561 million and it was a 44% increment YoY. Coupled with that, the operating cash flow was $67 million and it marked a 47% increase.

Snap also revealed it is still making an investment in its Discover platform in a bid to create a sustainable content sharing platform with increased engagement. Accordingly, the total time users spent daily to watch Discover spiked by 35% YoY. Likewise, users aged over 25 accounted for a 60% YoY increase in those watching Discover daily.

Coupled with that, about 50 shows were able to gain over 10 mullion viewers. And 78 international Discover channels were launched, which was a significant increment from the 53 in Q3 of 2019.

Further, Snap outlined its growing investment in its camera platform and augmented reality. 70% of community members engage with AR every day, and 735,000 lenses have been designed by the Snap community.

Q1 2020 Performance

In the first quarter of 2020, Snap reported 229 million DAUs, which marked a 20% YoY increase. Its revenue stood by $462 million, accounting for 44% YoY, whereas operating cash flow spiked by 109%. The actual value was $6 million.

DAU for the quarter surged by 20% and there were 229 million DAUs on the platform. Also, these users were more in North America and Europe. The same can be said about the high number of users from iOS and Android devices. Interestingly, users created around 4 billion Snaps daily in Q1 2020.

There was also a 35% increase in the number of times users spent snap chatting. And the time spent watching Shows also doubled in comparison to Q1 of 2019. The growth was also evident with about 60 shows have over 10 million views, unlike the 50 shows that had the same views in Q4 of 2019.

And like Q4 of 2019, Snap is still investing in its AR and camera platforms. 70% of users in the Snap community employed AR each day. And about 900,000 Lenses were developed using Lens Studios. Lens Web Builder is also an AR tool that has been launched to enable advertisers to set up AR Lenses easily. What’s more, Snap says it has increased the money invested via upfronts. And the direct response advertising is almost the share of its revenue.

Recent developments

Snap is carrying out a pilot phase for new designs for Snapchat. It is expected that a more intuitive and easy to navigate application could potentially boost the company’s profitability. For instance, one major redesign is targeted at enhancing the user’s experience while using the Snap Map.

According to Snap, it is exploring ways to provide easy navigation throughout the camera application. Also, it noted that it is requesting its customer’s feedback, which will help in determining the design for newer versions of the app.

Updates to Trending News Headlines

Asides from Snap Map, the company is also looking at revamping the trending news headlines offered to app users. In the company’s words, it’s in the early stages of examining how the News offerings on Snapchat can be enhanced.

Coupled with that, there have been significant changes in management. In May 2019, Derek Andersen became the company’s, Chief Financial Officer. The CFO took over Lara Sweet, who has advanced to become the company’s, Chief People Officer.

Snap Launches a Certification Program

On the other hand, Snap launched an ads certification program in June 2020. The program is called Snap Focus and it is aimed at advertisers. Focus teaches new and existing advertisers on the social media platform all they need to know about the ads it offers. It also provides tips on getting the most value from taking advantage of the various options it offers.

Accordingly, some courses that are provided on Snap Focus are centred on topics like “Intro to Snapchat,” “The Snapchat Generation,” “Advertising on Snapchat,” “Getting Started on Ads Manager,” etc. Alternatively, Snap Focus can be likened to features like Blueprint and Flight School as found on Facebook and Twitter respectively.

Snap to Launch App Store

Snap also revealed its plans, which could help it pose a greater competition to Facebook, Apple Inc., and other top tech companies. The company revealed it will be launching an application store and improving its gaming platform. Also, it will offer the facility for developers to create augmented reality models.

Interestingly, another major plan of the company is to allow other applications to integrate with Snapchat. And this will be the first time the capability will be offered. Businesses will also be added to the Snap maps.

The Surge in Platform Users

Although there was a decline in the growth in the number of Snapchat users in 2018, the same was not the case in 2019. At the time, the daily users on the platform had surged to 229 million, thereby taking on the 166 million daily users on Twitter. Nonetheless, this number is still far behind Facebook’s 300 million daily users.

Snap has also collaborated with Zynga in a bid to create more games within Snapchat. The first game created as a result of the partnership is Bumped out. The latter is a multiplayer game and it was launched in June 2020 at the Snap Partner Summit. Asides from Bumped out, Zyna has also launched various games on the Snap Games platform. Notable among these games is Tiny Royale, a battle game tailored to Snapchat users.

Conclusion

Snapchat is among the most popular messaging apps out there, and its major source of income is advertising. The application has recorded a surge in revenue, engagement, and the number of daily active users. Snap is also focused on augmented reality in a bid to enhance user experience and be a tough competitor to Facebook, Twitter, and other top social networks. These are the details you should be armed with if you’re considering investing in SNAP.

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