How can Snapchat grow its revenue?

Snapchat is relatively new to the advertising game: The very first ad on Snapchat appeared on October 19, 2014 showing a 20-second video trailer for the movie Ouija. Snapchat advertising has come a long way since its inception 20 months ago, it now offers a full advertising solution with advanced targeting, measurement and pricing capabilities. (Check out my post on Snapchat’s advertiser offering.)

The future for Snapchat is bright and there are many opportunities Snapchat can capture as it develops its current advertising solution into a full-fledged platform.

How can Snapchat grow advertising revenue?

Integrate with programmatic buying platforms: Snapchat currently uses a direct ad sales team to work with brands and media buyers, which is very labor intensive. It can dramatically boost revenue by integrating a programmatic buying solution and allowing automated buying through an API. Opening up an API allows for more types of ads, including those with calls to action for consumers, such as installing apps or buying products. These direct-response formats are essential for any mobile ad business that wants to cater to a broad base of marketers. There have been news about Snapchat looking to acquire an adtech startup to start building its API. Whether the technology is built in-house or acquired from another company, in order to scale its advertising platform Snapchat needs to integrate with programmatic buying. Integration with programmatic buying platforms pave the way for 3 main opportunities for its advertisers:

1. Advanced targeting with third party data: Snapchat can enable advertisers to utilize their own user data and 3rd party data for targeting, allowing for advanced targeting options like remarketing or behavioral targeting.
2. Cross platform targeting for advertisers: If Snapchat enables the use of demand-side-platforms (DSPs) through its API, advertisers who run video campaigns across different platforms will have the option to expand their campaigns to Snapchat. Since programmatic buying through DSPs provide huge benefits for advertisers, like aggregated reporting, creative optimization or frequency capping across ad networks, Snapchat would become a more attractive platform to advertisers who are already using these technologies.
3. Ad sales without direct sales costs: Having a direct sales organization have high costs as it is a labor intensive strategy. With an API there is a lesser need for headcount since it automates the process of placing orders, delivering creatives, targeting audiences, and measuring the success of the ads.

Ads in User Generated Content (User Stories): Snapchat has stayed away from placing ads anywhere near user generated content, mainly to assure brand advertisers that their ad impressions would be appearing near premium or curated content. Snapchat’s recently launched feature “Auto-Advance stories”, which autoplays user stories stitched together, is hinting at the launch of ad formats that appear in between stories. It would be a huge opportunity in increasing ad inventory to embed mid-roll video formats in between user stories. In order to ensure a good user experience, Snapchat should be careful in adhering to the strict native ad formats (short vertical videos) and limiting the number of ad exposures.

Pre-rolls: Even though Evan Spiegel has previously stated “Pre-rolls are really annoying because it gets in the way of the content you want to watch.”, if done right, it can add a huge amount of new video inventory that would not lessen the user experience. With a strong behavioral targeting algorithm and strict standards on native short vertical video ad formats, pre-rolls would be an important addition to Snapchat ads. For example, a user who has regularly interacted with the Discover channels CNN, DailyMail and NatGeo could be classified into a “World News and Culture” interest group and shown pre-rolls targeted towards this segment, like the launch of a new documentary, making it interesting and not annoying.

Grow its user base and the amount of user generated content: More users and more content simply means more ad views for Snapchat. So growing its user base is a basic strategy for growing its revenue. Even though Snapchat adoption is growing at an explosive rate, there are changes that can be done that would accelerate this growth even further:

1. Provide guidance for new starters: Even though Snapchat has been mainly used by and geared towards the young population between the ages 13–25, as the platform matures, so will its user demographic, bringing in a huge number of first time users. Since the controls and interactions in the app are not similar to other apps generations older than 25 are used to, adding a tutorial for on-boarding newcomers would help scale growth, increase content creation and reduce churn.
2. Having the ability to upload pre-recorded videos: I’m guessing this has been Snapchat’s strategic decision to ensure the user generated content is ephemeral and personal — not curated or produced. However, users occasionally need to shoot videos in the fastest way possible to capture a passing moment and the phone’s camera app comes in the fastest. Users should be able to use these moments in Snapchat and share them with their friends, just because they didn’t record their video in Snapchat should not ban them from doing so. Giving users the option to use pre-recorded video would increase engagement and retention.
3. Group messaging feature: Snapchat’s main use case is usually not for serious messaging but for more fun and visual applications, which makes it a great fit for group chats. And group chats are probably the most fun chat environments on mobile. Having the ability to chat in groups using snaps would fit perfectly into what Snapchat wants to achieve and boost engagement within the app.

Since Snapchat provides a method of digital communication that is more human, more ephemeral and emotional, it has the potential to become a new standard of mobile interaction. As Snapchat makes its way to the phones of more people, its advertising business will follow this growth closely if Snapchat keeps delivering product innovation and improving its ad solution. It will not be far until Snapchat breaks the $10B revenue mark (it is estimated to be $300M in 2016) and becomes a tough competitor to digital advertising giants like Google and Facebook.