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Snap Inc. (NYSE: SNAP), the maker of Snapchat, reported Q3 2017 earnings on Tuesday, November 7th and continued its streak of missed Wall Street’s expectations. Snap saw a decrease in both its quarter-over-quarter user-growth and average-revenue-per-user.
Snap’s share price closed at $15.12 and after Snap announced earnings the share price dropped 16% down to $12.65. The stock is now down almost 30% since March in a sector that has grown nearly 50% this past year. So what’s happening? Where is Snapchat going wrong?
“If you’re not paying for it then you’re the product”
Snapchat’s main source of revenue is advertising. As of now, advertisers are just not paying as much for Snapchat’s platform in comparison to Facebook and Google (see Figure 2). There are three main reasons for this: (1) Lack of Audience Data, (2) Weak Influencer Marketing, and (3) Product User-Experience.
Lack of Audience Data for Advertisers
September 2016, Snapchat rolled out Snap Audience Match. This provided the ability for advertisers to upload their own user data in creating targeted ads. While Snap Ads Platform is a step in the right direction, Snapchat also gave users the choice to opt out of targeted ads thus decreasing the number of potential viewers.
On social media sites such as Facebook, Twitter, and Instagram users are able to easily search for a celebrity and the celebrity’s account shows up in search results. On Snapchat, users must first know a person’s username which is not always the most intuitive. So when brands advertise on Snapchat they know they’re reaching an influencer’s existing fan base and there’s little chance of non-subscribers stumbling upon the influencer’s account and seeing the ad.
Product User Experience
69% of Snapchat users skip ads “always” or “often” and that number rises to 80% with the millennial demographic, which is Snapchat’s largest user base. The product has been cited as difficult to use by some users. Most recently shared by Nicki Minaj, “Dis tew much. I’m bout to delete this s–t” on her Instagram.
During their earnings call Snapchat shared they strongly misjudged demand for Spectacles and purchased more inventory than they anticipated selling. As a result, recorded a $40 million dollar inventory mismanagement expense.
So What’s Next?
Snap Inc. is in an interesting position. More than 60% of people aged 13–34 in the US with smartphones use Snapchat. Snapchat is the 3rd most popular social media app among millennials behind Facebook and Instagram and 70% of its users are women. Snapchat has already rejected acquisition offers from Facebook for $3B and $4B from Google.
Now that Snapchat’s user growth has stagnated they have shared they will be completely redesigning the Snapchat platform. This potentially could make the app a lot easier to use and more attractive for older users. However, this is not without its uncertainty. Snap may inadvertently alienate its current user base with a redesign.