Please ensure Javascript is enabled for purposes of website accessibility

Snap Should Have Listened to Its Customers

By Natalie Walters – May 15, 2018 at 1:11PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Snap is facing the consequences of pushing for a redesign that users didn't want.

Snap (SNAP -3.63%) seems to have forgotten the No. 1 rule: The customer is always right. Since the day Snap's now infamous redesign got its wide release, users have begged Snap to reverse it. Snap was convinced it knew best; however, its weak earnings report says otherwise. 

On the earnings call, Snap executives seemed to justify the disappointing results by reminding investors that it was focusing on long-term growth and that gaining more users was its top priority. But if Snap is so focused on growing users, then why did the company push a redesign on its users that the majority of them overwhelmingly hated? 

If the company was hoping the redesign would be the start of a much-needed turnaround, it might want to keep looking. 

The ghost in Snap's logo is seen against a yellow background with the words "new products coming soon!" underneath

Snap's redesign is getting a redesign after negative feedback. Image source: Snap.

Snap users lose interest

The majority of Snap's users could all look at the company with pity this week and say, "I told you so."

Back in February, over one million disgruntled users signed a petition on claiming that the new design that separated friends' posts from publishers' posts was frustrating and confusing. Rather than listening to its loyal users, Snap responded to the petition and basically told them why the new design was actually better. 

So, it should come as no surprise that Snap missed the mark on its daily active users this past quarter, reporting a year-over-year increase of 15% to 191 million DAUs for the quarter vs. the 194.2 million analysts were expecting. 

Unfortunately, this wasn't the worst bit of news. The scariest piece of information was Spiegel's remarks that its March DAUs were lower than its 191 million quarterly average DAUs. That means the month of March was a worse month for DAUs than February, and it implies that users may not be getting used to the new design after all, but instead are coming to the app less often.

That could be why Snap has recently backtracked on a big part of its redesign by working on an updated version that will recombine posts from friends with posts from celebrities, publishers, and influencers. Maybe if Snap had responded to its customer pleas back in early February, these issues could have been avoided. 

Snap's advertisers get cold feet

If users don't like your product, then your partners might start to slink away. Earlier this month, SelectAll reported that some publishers on Snapchat saw their traffic plummet after the app's wide release of the redesign on Feb. 6. One source said its overall traffic on Snapchat's Discover page had been cut by more than 50%

Snap's publishers are crucial for Snap's revenue because their content provides a prime space for Snap to run ads. So, if the loss of user traffic gives publishers cold feet, then advertisers might also get cold feet. The users, publishers, and advertisers' happiness are all inter-connected. 

Snap CSO Imran Khan tip-toed around this issue on the earnings call by saying because there has been so much negative press about the redesign, it's natural for some advertisers to pause. He said there was no way to tell the percentage of advertisers that were turned off by the redesign and the negative feedback on it, but he indicated that it had been "a disruption on the selling process."

Khan noted that advertisers should be drawn to Snapchat because the app is still a strong product for millennials, who will be an even bigger driving force of the economy in the upcoming years. The problem is, millennials were the ones asking Snap to do away with the redesign, and Snap said no. Hopefully, Snap learned this quarter that if it wants to keep its large base of millennial users, then it needs to pay more attention to them. 

Snap's revenue bomb

As you can probably guess, Snap's revenue for the 2018 first quarter also missed the mark by a long shot with a 54% increase year over year to $230.7 million vs. the $244.5 million analysts were expecting. The stock reacted violently, dropping as low as 20% after Snap reported on May 2. 

But that wasn't the worst part about Snap's revenue. The real sinker was when Snap CFO Drew Vollero said the company expected its second-quarter year-over-year revenue growth rate to "decelerate substantially from Q1 levels." 

Snap attributed the expected deceleration to lower ad prices. In the first quarter, ad prices were down a stunning 65% year over year. That's mainly a result of Snap replacing its direct ad sales force with its auction-based advertising system called "programmatic," which gives ad spots to the highest bidder.

Vollero noted that Snap's priority is getting as many advertisers on its platform as possible before it starts to give a closer look at pricing. But it's hard to attract advertisers if both users and publishers aren't happy with your product's recent redesign. 

The simple, fix-all solution for Snap is a period of explosive user growth that would excite advertisers to spend money on its platform, which would drive its revenue up. But in order to get user growth to spark such a turnaround, Snap needs to refocus on its users and what they want. 

Natalie Walters has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Snap Inc. Stock Quote
Snap Inc.
$9.82 (-3.63%) $0.37

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/02/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.