Snap grew revenues faster than users

From the perspective of unit economics, Snap Inc had a positive Q2 2018.

The "camera company" saw revenue from advertising increase 44% to $262 million in the quarter, compared with $182 million in Q2 2017. Daily active users (DAUs) increased by 8% to 188 million and average revenue per user (ARPU) increased 34% to $1.40 worldwide. For context, Facebook's ARPU was $5.97 worldwide, according to its latest earnings report.

"The platform is still a long way behind its rivals Facebook and Instagram in terms of advertising dollars and audience size, and its other businesses like Spectacles and Snapcash haven’t achieved much success so far," said Yuval Ben-Itzhak, CEO of Socialbakers. 

Shortly after announcing its earnings, Wall Street demoted the stock for failing to meet analyst expectations around the growth of DAUs. Analysts had expected 193 million DAUs, and the 188 million figure represents a 2% decline compared with Q1. But after Prince Alwaleed bin Talal of the Kingdom of Saudi Arabia announced a $250 million investment for a 2.3% stake, stocks soared by nearly 13%.

Analysis: Factors propelling revenue growth

Strategy

Snap has traditionally relied on a direct sales channel for its advertising solutions, which was intended to retain a higher margin of sales and qualify advertisers early on. While this tactic did achieve its short-term objective, it also cut off the company from a large potential pool of advertisers and agencies.

Learning from its mistakes, Snap set out to democratize access to its ad platform, taking on InMobi as a channel partner in APAC, a growing market. Advertisers and agencies in North America and Europe were offered access to a self-serve platform with a full suite of tools needed to optimize and measure campaigns run with Snapchat. These updates include the ability to bid on goals such as web conversions, return on ad spend reporting, and conversion lift capabilities.

Advertisers and agencies were also granted access to directly purchase campaigns for Lens using the Reach & Frequency tool in Ads Manager. All advertising formats—including Snap Ads, Story Ads, Lenses, and Filters—were made available programmatically. Lowering the barriers to entry from purchasing its ad formats led to a surge in sales. 

Products

The growth can also be attributed to the launch and adoption of three features aimed at customers, advertisers, and developers. These included Snappables, an augmented reality (AR) experience that is shareable and can be controlled with touch, motion, and facial expressions.

The most notable feature launch was the much awaited Snap Kit, allowing developers to build products on top of the Snapchat data & ecosystem, roping in more stakeholders with a vested interest to grow audiences on the platform. According to Snap Inc, companies such as Pandora and Tinder utilized the Snap Kit to enable sharing with their own platforms.

This feature also allowed developers to integrate branded stickers, filters, links, and other highlights, growing the need for advertisers to direct audiences toward earned media potential from user-generated content.

According to Ben-Itzhak, Snap is rumoured to be diversifying into gaming as well.

Measurement

To compete with the duopoly and build credibility with advertisers that demand measurability around tactical effectiveness, Snap partnered with Nielsen for deeper audience targeting capabilities. This resulted in media buyers gaining access to 30,000 audience segments on Snapchat through Nielsen Catalina and Nielsen's marketing cloud.

The credibility of the global research and measurement company gave Snap the cachet to be seen as a trustworthy platform. Advertisers and agencies, empowered for the first time with access to Snapchat's user including demographics, buyer insights and mobile behaviour, were able to justify the use of the platform in digital media planning and buying plans, accelerating commercial adoption and test campaigns.