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How Does Snapchat Make Money?

By Andrew Tonner – Updated Sep 27, 2018 at 11:13AM

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As a Snapchat IPO looms in the horizon, the vanishing video startup has shifted its efforts to monetization and revenue growth.

This article was updated on May 16, 2017, and originally published on June 3, 2016.

Snap is valued at over $20 billion.

That's nearly double the value of Twitter (TWTR), arguably the most high-profile social media giant to IPO in recent years.

Following the IPO, the company's focus has shifted toward monetization and revenue growth in coming years, let's review how Snap plans to make ever-greater sums of money in the years to come.

Two girls on a bicycle on a country road, taking a selfie with a smartphone

Image source: Getty Images.

How does Snap make money?

Though very much in flux, co-founder and CEO Evan Spiegel has previously described Snap's business model as having three distinct points of monetization: camera, content, and communication. 

In terms of monetizing its camera interface, Snap has developed a branded geofilters business, which gives individuals and businesses the opportunity to purchase filters inside Snap's popular stickers section. For example, the recent X-Men: Apocalypse film paid to have branded X-Men filters take over Snap in the run-up to its launch. This campaign reportedly also included the functionality for users to swipe the filters to purchase tickets, which adds an e-commerce opportunity from which Snap could derive revenue.

In addition to these mass-market promotional campaigns, Snap also allows users to purchase sponsored filters covering smaller geographic areas. A friend of mine recently purchased one to cover the one-block area around the bar where he held his going-away party in New York City, where I live. This in some ways mimics how other social media giants like Facebook (META -1.54%) appeal to advertisers (or partiers, as it was in this case) both large and small.

Turning to media content, Snap launched its Discover functionality in January 2015, which allows major media outlets to push short-form content onto Snap for its video-hungry masses. It isn't clear how much revenue Snap generates from this business, but content distribution has already emerged as an obvious monetization point as Snap continues to grow its revenue.

The last -- and least defined -- area of Snap's business is communication. At present, Snap has no direct way for companies to connect with consumers via Snap's popular chat function, though a broader industry trend suggests an opportunity exists. As just one example, Facebook-owned WhatsApp and Facebook Messenger have both rolled out products that enable companies' customer service communications to flow through their services, rather than exist online or over the phone. Again, Snap's plans aren't clear, but Spiegel specifically mentioning communication as a piece of Snap's business model suggests it plans to monetize this popular part of its platform at some point in the future.

Snap's road to $1 billion in revenue

Snap's shift to prioritize revenue growth could produce surprising results sooner than many observers might realize. A pre-IPO investor presentation viewed by TechCrunch, Snap told investors it expects 2016 revenue to fall between $250 million and $350 million, up from a reported $50 million in 2015.

Having seen Snap report one quarter's worth of financial data, it seems as if the company will likely exceed this feat. For its Q1 2017 report, Snap increased revenue 286% year-over-year to $149.6 million. The company's slowing user growth clearly spooked some investors; Snap stock sold off dramatically in the wake of the earnings release. 

That said, the full effect of Snap's nascent monetization efforts continue to scale; Snap told investors it expects 2017 revenues to increase to between $500 million and $1 billion, an impressive figure for a company that launched in mid-2011. As a point of comparison for Snap's sales growth, it took Facebook six years to top $1 billion in sales. Twitter needed eight years.  

Many have questioned Snap's place as one of the most valuable start-ups in the world. But implausible as it might seem to those unfamiliar with it, Snap has a clear plan in place to make good on its valuation -- sooner, perhaps, than many realize.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.

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