Advertisers say Snapchat's unique selling point is that it's the cool, new thing -- which puts a lot of pressure on the company to stay relevant

Evan SpiegelGetty/Michael KovacSnap Inc. CEO Evan Spiegel.
  • Snapchat is at the mercy of competitors like Facebook and Google that can simply copy its products.
  • Advertisers say Snapchat’s unique selling point is that it is cool, new, and has created its own advertising “currency.”
  • But ad-buyers also need Snapchat to do more to prove its ads actually drive sales if they are going to commit meaningful budgets to the platform.

Snapchat parent company Snap Inc. lifted the lid on its advertising business when it made its IPO public earlier this month.

We found out that the company generated $404.4 million in revenue in 2016 (up 6x year-on-year), that it has 158 million daily active users, but also that its daily active user growth was flat in the quarter to September 30, 2016.

That was the same quarter in which Instagram launched its Snapchat-clone Instagram Stories — allowing users to share videos and photos that disappear after 24 hours. Instagram says the feature is used by 150 million users each day, which is a very similar number to Snapchat’s total daily active user base.

In the “risk factors” section of Snap Inc.’s S-1 filing, the company concedes that it competes with companies like Apple, Facebook, Instagram, WhatsApp, Google, and Twitter — all of which have “significantly greater financial and human resources and, in some cases, larger user bases.”

The S-1 continues:

“Snapchat is free and easy to join, the barrier to entry for new entrants is low, and the switching costs to another platform are also low. Moreover, the majority of our users are 18-34 years old. This demographic may be less brand loyal and more likely to follow trends than other demographics. These factors may lead users to switch to another product, which would negatively affect our user retention, growth, and engagement … Falling user retention, growth, or engagement could make Snapchat less attractive to advertisers and partners, which may seriously harm our business.”

So if rivals have bigger user bases and the financial and human resources to build copies of the products that make Snapchat stand out, what is it that Snapchat offers advertisers that they can’t get from any other platform?

We asked a range of media buyers to find out. People in the advertising industry seem impressed that there is a new player on the block that is challenging the market to produce new formats and meaningful metrics — but the young advertising business still has a long way to go if it is to start commanding the kind of ad spend that Facebook and Google can.

Snapchat is cool and taps into young people’s latest ‘obsessions’

As Snapchat itself notes, the majority of its users are the young advertising segment most advertisers look to target. Users under 25, it says, visit Snapchat more than 20 times and spend more than 30 minutes on the app each day. It may have fewer users than its rivals, but, for now at least, they are highly-engaged, and data suggests Snapchat is still the cool new thing among young people compared to apps like Facebook that their parents use.

Jason Stein, CEO of social media agency Laundry Service, said: “Snap is the sexy new platform and to succeed on Snapchat as a brand is to be cutting edge, relatable, and relevant to young people. You’re seen not only as making the effort to speak to this youth audience on their terms — but a brand that is actually ‘young’ and cool enough to do so.”

Noah Mallin, head of social North America at WPP media agency MEC, said Snapchat offers an impressive and growing suite of ad products that taps into three of the “biggest obsessions consumers have right now”: messaging, augmented reality, and visual storytelling.

As Snap details in its S-1, the same team that designs Snapchat’s consumer products also designs its advertising products, which means it creates ad products “that feel familiar to our community,” like full-screen videos, Sponsored Lenses, and Sponsored Geofilters.

That’s a compelling story for advertisers, according to Mallin. But Facebook offers messaging products through Messenger and WhatsApp, and augmented reality and visual storytelling through Instagram. What makes Snapchat so different?

Mallin responded: “It’s across different platforms with Facebook rather than all Facebook in one place — for now — and the augmented reality elements aren’t yet part of the core experience there. Another big difference is that what binds people to Snapchat initially is the camera-first messaging experience. Messenger is trying to pivot there but that really isn’t the core of any of Facebooks products hook users with — at least not yet.”

Its ad formats are unlike anything else

Snapchat doesn’t copy and paste its ad formats from elsewhere on the web. Where else can you buy a Sponsored Geofilter that lets users add branded location-based stickers to their photos, or a Sponsored Lens that lets people turn their faces into a Taco Bell taco?

Catie Dear, head of entertainment at UK media agency at The7Stars, said Snapchat’s focus on “sound-on” video ads has been appealing to its entertainment clients. Lots of entertainment brands use Snapchat to land new movie trailers or tracks from artists — the first ever Snapchat advertiser was 20th Century Fox, promoting its “Ouija” horror movie.

Dear said: “Working with entertainment brands, it’s important for someone to hear sound, which isn’t that common an offering in the [digital ad] market at the moment … Snapchat is also about telling a different brand story. The behaviour on the app is very different as you want to focus more on shorter content, whereas on Instagram, people tend to watch longer videos.”

Dominique Delport, global managing director of the Havas Media Group, has also been impressed that Snapchat has created its own ad currency, forcing advertisers to be creative.

He said: “Even media publishers that are part of the Discover [content section within the Snapchat app] had to completely rethink the way they present their content because Snappers skipped it in three seconds. They have been instrumental in imposing the vertical video format — again, smart and insightful. [There is a feeling] that Facebook and Instagram are chasing them big time — and there was an impact in the last quarter — but I’m very optimistic on their ability to create, surprise, and delight their audience — and the Adland community.”

Snapchat needs to constantly prove its advertising actually works

But being the cool new thing with never-before-used ad formats comes with challenges: The company needs to constantly create cool new things and Snapchat needs to consistently prove its ads actually work if it is to move from the small experimental section of advertisers’ budgets and into the big leagues.

SnapSnap Inc./SECSnap included research from Advertiser Perceptions in its S-1 document that showed it ranked first in overall advertiser satisfaction in September 2016.

Snap has been making huge improvements in this area and it now offers 15 different third-party measurement solutions in the US, including partnerships with companies like Nielsen, Moat, Oracle, and Millward Brown. The S-1 also details its internal “Snap-to-Store” measurement product that uses the location-based features of the Snapchat app to determine whether people who saw an ad on the app went on to visit a retail store.

But, with its relatively young advertising business (it only began selling ads at the end of 2014), Snapchat is playing catch-up to its digital media rivals. And even the two most dominant players — Facebook and Google — get accused of “marking their own homework” when it comes to advertising measurement. Advertisers take a lot of convincing to shift their budgets from the traditional channels they have been using for decades to build their brands.

The Wall Street Journal reported in January that Snap is seeking huge commitments from media buyers of between $100 million and $200 million. For a company like WPP, that type of agreement could see it more than double its Snapchat ad spend of $90 million in 2016. But other advertising holding companies would be significantly upping — likely tripling — their Snapchat spend if they were to agree to such commitments. (Here’s a primer on how advertising commitments tend to work.)

But a source at one media-buying network, who declined to be named, said Snapchat still doesn’t have the advertising metrics in place to drive the level of commitment it is asking for.

In the S-1, Snapchat says its vertical video ads are “as good as television” — and in some ways better — because users can choose to skip ads, swipe up to interact with them, and advertisers can use more granular targeting than TV. But with AdAge reporting in November that the average Snapchat video ad lasts less than three seconds and Snapchat counting a video “view” as soon as the video opens, it remains to be seen whether its ads are more effective than those on TV. Snapchat has moved quickly to provide measurement options, but it needs to be seen as the platform that can drive meaningful business results — which requires numerous case studies, b2b marketing, and yet more measurement capabilities — if it is going to take a slice of the big ad budgets.

Despite their gripes, most people in the advertising industry want to see Snapchat succeed. A successful Snapchat serves as competition to the digital duopoly that is Google and Facebook.

The7Stars’ Dear said: “Overall, it’s positive to have multiple platforms forcing each other to improve. Whether it’s [measurement] reporting, being more transparent, including Moat reporting — I feel if they weren’t all challenging for the same budget, there wouldn’t have been such a push towards things like transparency.”

To keep winning those budgets, Snapchat needs to stay on the front foot so that even if competitors do mimic its products — or if a new upstart launches — it has enough new features to keep users and advertisers coming back. Arguably, it’s a challenge that every ad-funded consumer business faces. But with Snap Inc. becoming a public company this year, whether it can meet that challenge will soon be laid bare for all to see.

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