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Snapchat Charges $750K For An Ad -- Good News For Facebook

By Adam Levy – Jan 25, 2015 at 7:11AM

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Facebook offers advertisers more than Snapchat, so the upstart's reportedly high ad cost could benefit Facebook's pocketbook.

Snapchat is starting to get in bed with advertisers... for a hefty price. Source: Flickr/Maurizio Pesce.

Reaching the cool, young, impressionable audience that uses Snapchat won't come cheap. The photo-sharing app is asking $750,000 per advertisement on its platform, according to a report in AdWeek that cited unnamed sources. The ads will be available for users to opt into for 24 hours before self-destructing. Snapchat is reportedly very firm on its minimum price.

Many have chided Snapchat's management for asking so much for so little compared to other social media advertising like Facebook (META -1.54%). Snapchat offers limited reporting capabilities, doesn't tell advertisers how many people viewed the ad, and can't break down viewing percentages into male and female users. It's much more like television advertising than social network advertising.

For now, Facebook might offer an excellent value compared to Snapchat. But the small start-up may give Facebook the opportunity to raise its video ad prices faster.

How many people will view your ad?
For $750,000, business would probably prefer to have some idea of how many people viewed their ad. While Snapchat doesn't provide any reporting metrics, and it's relatively quiet about its active user base, we know the app topped 100 million monthly active users last August. But not all of those users are on the app every day, and not all of them will opt to watch an advertisement. So, while the maximum reach might be over 100 million people, actual reach is a very small percentage of that.

With Facebook, advertising is pretty straight forward. You upload a video and a budget, enter some target keywords and demographics, and it tells you how many people you can expect to reach. Based on my calculations, for $750,000, a business can reasonably expect to reach 24 million to 58 million users aged 15 to 34. (Those estimates vary every day because Facebook uses an auction system to determine ad prices.) On top of that reach, Facebook provides some nice detailed analytics.

So, why advertise on Snapchat?
There are a few advantages to advertising on Snapchat over Facebook. First, users that view ads in Snapchat are required to opt-in and then press-and-hold the screen in order to view the advertisement.

On Facebook, a video view counts if it plays for three seconds or longer. So, that 24 million to 58 million number may be inflated, especially considering Facebook's autoplay feature. Facebook will break down exact metrics on how much of the video viewers watched, though.

Additionally, Snapchat's ad format -- a sponsored video in users' My Friends tab -- is an excellent native format. Snapchat has been adding content from non-friends for a while with its Our Story feature, which includes photos and videos from big events around the world. While metrics on Our Story are kept under wraps, the increasing number of them indicates they've been a success. Snapchat users have not blinked at the chance to "press and hold" on things that don't come from their friends.

For some advertisers, these benefits will offset the inability to track how well their ads perform.

Why Facebook video ad prices will go up
While Facebook started with high minimum ad spends for its video units, it's come down to levels accessible by anyone. Over the last year, Facebook has worked to encourage the huge number of small businesses on its platform to upload more video content. The next step is to convert those video uploads into advertisements, which seems to be happening already.

As Facebook converts more businesses into video advertisers, its average video ad price will go up because of more bidders. With Snapchat setting its price at reportedly $750,000, Facebook's ads will theoretically reach parity with Snapchat's on a price per estimated view basis. That's assuming Facebook ads are equally as effective as Snapchat ads. They're probably better considering Facebook can insert a call-to-action button.

Snapchat's reported asking price for advertisements indicates there's a lot of room for growth in Facebook's average video ad price. Last year, average ad prices increased dramatically every quarter, including a whopping 274% in the third quarter. With the growing number of video ads in 2015, investors should expect average ad prices to continue climbing.

Investors shouldn't get too excited, though. While video ads will surely give Facebook a boost in ad revenue, a lot of that revenue is set to get reinvested in the company. In the third quarter, CFO Dave Wehner guided for a $2.5 billion increase in OpEx for 2015 to invest in ad-tech, WhatsApp, and Oculus, among other things. The good news is it looks like Facebook's flagship product will be able to make up for the increased spending.

Adam Levy has no position in any stocks mentioned. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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