The Failure That Led Snap Inc. To Its Business Model

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There’s a fun little section in today’s Snap Inc. IPO filing titled “Why We Sell Ads.” It’s odd, in a way, that Snap should have to explain this in the first place—advertising is the company’s primary source of revenue, after all.

Yet it starts with a candid admission that “When we first started building Snapchat, we didn’t know how it would make money.” Like so many other tech companies, Snap was focused on creating fun ways for people to share pictures on smartphones and so they didn’t even consider how to make money. But soon they realized that “we needed to start monetizing—and fast. Our server bills were getting expensive.”

They knew that people liked to draw funny things on top of their pictures—they already offered some free as well as advertiser-sponsored Lenses—so they figured those same people would be willing to buy even more options. Snap opened the Lens Store at the end of 2015; you could now buy animations to stick atop your selfie—each one cost just 99 cents as an in-app purchase. But the results were disappointing. They closed the store after just two months, in January 2016, and gave away all the Lenses for free.

That’s when things get interesting… After the Lenses became free, the Snap community began creating a lot more pictures.

From Snap Inc. IPO filing.

“We learned that asking users to pay for Creative Tools was a bad idea. It meant introducing more friction into the process of self-expression, which was the opposite of what we wanted on Snapchat. We also learned something exciting about building new products: If we built more Creative Tools and made them available to everyone for free, our users would create more Snaps and spend more time on Snapchat.”

That’s why Snap decided to focus solely on advertiser-backed Sponsored Lenses and Geofilters, as well as making lots of their own. Active users now visit Snapchat more than 18 times per day on average, according to today’s filing, and spend 25 to 30 minutes on the platform. Advertisers reportedly pay between $100,000 and $700,000 per day for Lenses.

Snap’s 2016 revenue was $404.5 million, and it’s global average revenue per user was $1.05.

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