June 10, 2013

Justifying Snapchat's Valuation

Half a BILLION dollars.

Snapchat’s rumored $100MM raise is turning heads. How can this “toy”, valued at $70MM just four months ago, be worth so much? Yes, it’s explosive user growth is impressive, but ultimately it’s about revenue and Snapchat is making $0.

I won’t defend its valuation - it may be absurd - but I want to point out its monetization potential.

Here’s why Snapchat matters and why it has a massive opportunity to monetize.

Personal, Authentic

Ever have someone take your phone and scroll through your SMS messages? It’s unnerving. Why is that? It’s not because we have something to hide (OK, sometimes we might). This uneasy feeling comes from our expectation of privacy between two individuals. The way in which we communicate with our best friend in private is likely much different than how we express ourselves publicly on Twitter.

Snapchat promises to take that feeling we have over SMS and make it more personal, more private. And ironically, that comes with even more possibilities for marketers to connect with our personal selves.

Users Invite the Message

On Facebook, Twitter, and similar social networks, brands broadcast ads into our feed. These messages are uninvited and passively consumed.

Snapchat ‘snaps’ are always user-initiated. To view a message, users must actively hold their finger on the screen. The difference is subtle yet important. By actively tapping on the message, the brand captures the user’s attention (further amplified by the message’s 1-10 second expiration).

This conscious action, the option to accept the communication, illustrates choice-supportive bias. When given a choice, we tend to associate and remember positive qualities of the chosen option. This cognitive bias can distort our perception of advertising and increase retention of the brand’s message.

Snaps are Content

Snapchat isn’t a photo and video-sharing platform. It’s a messaging service that uses media to communicate with more fidelity than plain text. The content is novel and serves as a medium for self-expression (especially when/if Snapchat expands to include audio, stickers, and more).

And just like the evolution of advertising from print to television, Snapchat gives creative companies a way to evolve their ads from largely plain-text ads on Google and Facebook to something much more memorable.


But Snapchat has some unique challenges in its ability to monetize.

Due to its inherent ephemeral design, it lacks historical or demographic data to better target and report performance for its advertisers.

The product is also designed for one-to-one or one-to-few communication. While arguably, this is why its remains so sticky and personal, it inhibits user’s ability to broadcast to a wider audience.

Snapchat has yet to prove its ability to monetize, but like Twitter before it, companies will find creative ways to leverage this new medium (see Taco Bell’s Beefy Crunch Burrito campaign) and through this innovation, Snapchat stands to make a great deal of money from brand adoption.

P.S. I’m working on an upcoming book with Nir Eyal. Hooked will reveal the patterns and techniques used by today’s most habit-forming products like Twitter, Instagram, and yes, Snapchat. Subscribe to my email list to get a free copy.

P.P.S. Say ‘hello’ on Twitter or send me a snap (@rrhoover). :)

More Writing by Ryan