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Not sure SnapChat will become a profitable business

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71% of snapchat users are under 25. In a world where businesses try to attract and touch youngsters, this is a very unique selling proposition. Despite a market capitalization of 16 to 19b$ doubts still exist about the business model of snapchat and how it will monetize its users’ database. Will Snapchat be able to really leverage the value of its users’ database ? This is what will deal with in this blog post.

Snapchat’s concept

For those of you who don’t use Snapchat (and my guess is that MANY of you don’t use it), let’s start with a few lines on what the Snapchat application is.

Snapchat defines itself a video messaging application. It turned out that it had much in common with social media apps. What is shared between users are short video sequences that have a very limited lifetime. Once the video has been watched it disappears. The sender of the video can determine how quickly the video will auto-destruct : from 1 to 10 seconds.

Initially conceived as a students’ project, Snapchat was made available on iOS in November 2011, and on Android in October 2012.

Snapchat is believed to have 100m active users, 70% of them being women.

Snapchat’s revenue stream

The business model of Snapchat didn’t generate any revenues until “Discover” was introduced.

Discover is a snapchat functionality that allows brands to propose short video sequences to users. The number of brands currently present on Discover is still pretty limited. Among others, you can video content by CNN, MTV, Cosmopolitan, Food Network, Vice, National Geographic. Although most content is proposed by traditional broadcasters, you’ll notice that Discover is also used by niche video producers such as Vice and other players not primarily in the video business (Cosmopolitan, Food Network). Ads can be incorporated in these short video sequences.

The business model behind Discover is nothing but classical. It’s similar to broadcasting and this is in our opinion the major weakness of Snapchat for the moment.

Snapchat is not bringing a solution to the most crucial business issues

For traditional broadcasters, touching the 12-24 segment is of utmost importance. The Discover functionality is the answer to that quest.

However Snapchat doesn’t bring a solution to the move towards “narrowcasting”. Broadcasting is the diffusion of the same content to all viewers; narrowcasting is the personalization of this content depending on the users’ interests. Currently, Snapchat doesn’t allow to do that.

Snapchat has very limited knowledge of who its users are.

First of all it doesn’t require much information to use the application : a valid email address and a mobile phone number are the only two pieces of information required. Nothing else is asked to better understand who the user is.

Second, the very content which is shared on Snapchat makes it impossible to infer any behavioral data. Video content is of course difficult to analyze and its ephemeral nature challenges the very possibility to analyze it. But most important of all, the content shared on Snapchat doesn’t have much analytical value. People share mostly fun or sex-related content. Nothing really valuable for businesses to build upon.

Conclusion

We are very pessimistic about the business model of Snapchat. Its market valuation seems completely overestimated to us because Snapchat doesn’t address the quest for profitability that is the nexus of all businesses today. Rather it offers a one-content-for-all strategy that makes the ROI difficult to compute for brands.

One advantage though is the average age of its users. The 12-24 segment is a very attractive one, very difficult to touch and Snapchat may offer a solution for that. The question remains however whether brands will see Snapchat as a valuable channel where millions can be poured in, or only a marginal tool to complete a palette of communication channels. I’ll personally go for the second option.

Photo: Dean Drobot / Shutterstock.com
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Author: Pierre-Nicolas Schwab

Dr. Pierre-Nicolas Schwab is the founder of IntoTheMinds. He specializes in e-commerce, retail and logistics. He is also a research fellow in the marketing department of the Free University of Brussels and acts as a coach for several startups and public organizations. He holds a PhD in Marketing, a MBA in Finance, and a MSc in Chemistry. He can be contacted by email, Linkedin or by phone (+32 486 42 79 42)

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