It all started in a classroom. Somewhere a teenager thought that exchanging info during a class using Snapchat would be foolproof because if caught, the item had already been deleted automatically. From there, Snapchat took off. Feeding on tweens insatiable appetite to communicate secretly between each other a million times a day without being caught, either by peers or authority, the ephemeral photo app became a sensation.

So much so that today, it is poised to take rank in the otherwise very closed club of top social media apps, dominated for the last 5 years by Twitter, Facebook and Instagram. A recently released study by Emarketers shows that Snapchat’s US user base will jump by 27.2% to 58.6 million users , much faster than the overall projected growth of mobile messaging, projected at 16%. At that rate, by year’s end, Snapchat will have surpassed both Twitter and Pinterest. By 2020, it will have double the amount of users. The fastest growing demographic continues to be  under the 12 years old age group, which will grow at a rate just shy of 50% in 2016.

Snapchat to Grow 27% This Year, Surpassing Rivals
Snapchat to Grow 27% This Year, Surpassing Rivals

With 150 million active users, Snapchat has already passed Twitter but it is still far behind Instagram ( 400 million) or Facebook Messenger ( 900 million). The gap, according to E marketer’s projection, will continue to widen, as Facebook Messenger will continue to grow faster than its younger competition. One reason might be the drop-off rate of Snapchat users as they grow older. Another is simply the formidable penetration of Facebook in people’s lives, naturally fueling its Messenger growth.

Unlike with Instagram, Snapchat users do not seem to care about celebrities.
Unlike with Instagram, Snapchat users do not seem to care about celebrities. Source: Newscred

The challenge for Snapchat, as with any other social media platform, is monetization. Unlike Facebook or Instagram, the company did not try to force advertising into users personal feeds and instead created special channels. Called Live Stories or Discover Stories, they are very specific areas in which advertisers can reach the Snapchat audience, within editorial content. While inserting directly disruptive advertising within users one on one communication would have probably led to large user drop out, the creation of specific channels creates another set of challenges. Get users to watch them.

the Ouch factor: Snapchat users don't buy what they see
the Ouch! factor: Snapchat users don’t buy what they see. Source: Newscred

For now, the company has three different revenue streams: Live Stories, built around an event ( sports or concert for example) where aggregated content allows for brand sponsorship, Discover, that lets users consume  content from selected publishers and advertisers and filters/lenses, a series of brand sponsored overlay that users can place on their images.

According to a study by NewsCred, it is not working so well. While Live stories are watch sometimes by a third of Snapchat audience, the Discover Channels are never watched by 54%. While Snapchat posted $59 million in revenue for 2015 by mostly convincing advertisers about the potential, it still has much to accomplish to convert its audience into a cash cow. While no details are publicly available, it seems that filters/lenses might be the most impactful method of advertising on the platform.  But what, if any, are the ROI’s?

Snapchat users do not seem as excited by branded content as advertisers.
Snapchat users do not seem as excited by branded content as advertisers. Source: Newscred

Furthermore, the Discover channel is not easily scalable.There is only a finite number of publishers that can afford to have a Snapchat specific creative team. Live Stories, as well, distract users from the core usage and requires added attention time. And Stickers can quickly lose their appeal – or never even be seen – if the options are too numerous. In other words, considering Snapchat current models, there is little room for massive revenue growth.

Yet the company announced that it will generate $300 million this year and observers seem somewhat confident they can pull it off. Part of the reason  for this optimism is in a yet to be public advertising API as well as analytics tools. While appealing to brands and marketers, will it be enough to convert advertising dollars into measurable returns?

The good news for the company is that its core appeal doesn’t seem to diminish and, at least for the foreseeable future, it will continue to grow its user base. With such numbers, even small incremental success in advertising quickly become big dollar amounts. But beyond the appeal of novelty and the hunt for eyeballs, the success could stop if nothing of consequence emerges from the funnel. Solving the social media biggest hurdle: How to turn audience into a sustainable cash flow. It has been a painful challenge for Twitter and Pinterest, it might become one for Snapchat.



Photo by Margaux-Marguerite Duquesnoy

Author: Paul Melcher

Paul Melcher is the founder of Kaptur and Managing Director of Melcher System, a consultancy for visual technology firms. He is an entrepreneur, advisor, and consultant with a rich background in visual tech, content licensing, business strategy, and technology with more than 20 years experience in developing world-renowned photo-based companies with already two successful exits.

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