It's no secret that Snap (SNAP 2.89%) has been having problems selling advertisements on Snapchat. It's missed revenue expectations in every quarter since going public. Some investors blame Snapchat's poor user growth for the lower-than-expected top-line results. But below the surface, Snap's advertising performance just isn't cutting it for most marketers, which has shown up in average ad prices declining as Snap moves its ad inventory to a bidding system.
Snapchat is the only social platform for which the majority of marketers that have used it said the video ads they ran were ineffective, according to a recent survey from Wyzowl reported by eMarketer. Specifically, 73% of marketers that have used the platform said Snap ads were ineffective.
Among the most effective video ad platforms were YouTube, Facebook (NASDAQ: FB), and Instagram. Even 70% of Twitter (NYSE: TWTR) video advertisers found the platform effective.
Image source: Snap.
What makes Snap ads so ineffective?
There are two big factors that may lead to subpar performance from Snap ads compared to other social platforms: a lack of user data and a lack of ad engagement.
The data Snap can gather from Snapchat users is relatively superficial. While Snap offers to target users based on lifestyle categories like travel or beauty, its ability to categorize its users as interested in such categories is limited. It might rely on engagement data from its Discover section -- which features curated content from select publishers -- but only a small percentage of users actually view the Discover section.
By contrast, Facebook, Twitter, and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google have considerably better targeting data. Better targeting means ads get in front of the right people at the right time and, more importantly, marketers aren't wasting money on irrelevant impressions.
Snap ads miss the mark in another important area: They're usually not engaging. (Note, Snap's sponsored lenses and geofilters are highly engaging, but we're just talking about its interstitial video ads.)
While Snap boasts extremely high engagement for its users -- the average user spends over 35 minutes per day in the app -- hardly any of that time is spent looking at advertisements. In fact, 69% of Snapchat users skip ads either "always" or "often," according to a survey from Fluent, a data analytics company. That number climbs to 80% when considering just 18- to 24-year-olds. Snapchat is reportedly considering implementing ads that require users to watch at least 3 seconds before they can skip.
The impact on Snap's financials
An inability by Snap to effectively produce results for the majority of marketers on its platform doesn't bode well for future revenue growth. That's especially true considering the rising engagement on YouTube, Facebook, Instagram, and Twitter, which all currently present better alternatives for reaching audiences similar to Snapchat's.
That's to say, it doesn't matter how much time users are spending on Snapchat if ads aren't reaching the right people and if those they do reach just skip right over them.
Snap will continue to see its average ad price decline as it shifts a larger percentage of its ad sales to the self-serve platform. That will weigh on Snap's top-line growth even if more users join Snapchat. At some point its prices will stabilize, but it seems that soft demand will drive them lower than expected.
Not only did Snap have the least-satisfied customers of all the social platforms in Wyzowl's survey, it also had the fewest. Nearly 89% of those surveyed said they had not used the platform. That may have to do with the relative youth of its self-serve ad platform, but more likely it's a result of marketers' relative lack of interest in the product when there are better alternatives.
Even if Snap invigorates its user growth, it could remain demand-constrained for its ad products. User growth alone won't solve Snap's problems, and that should scare investors.
