How Does Snapchat Make Money? Business Model Explained!

Snapchat is a multimedia messaging application developed by Snap Inc, originally Snapchat Inc. One of the main features of Snapchat is that images and messages are usually available for a short period of time before they become inaccessible to their recipients.

The app has evolved from its original focus on person-to-person photo sharing and now features 24-hour “Stories” with chronological content from users, as well as “Discover,” which allows brands to showcase short content supported by ads.

Users can also keep their photos in a password-protected area that is just for them. Limited use of end-to-end encryption was also introduced, with plans to expand its use in the future.

Snapchat was founded by Evan Spiegel, Bobby Murphy, and Reggie Brown, graduates of Stanford University. It is known for representing a new direction for social media that emphasizes mobile devices and user interaction with virtual stickers and augmented reality objects.

As of December 2020, Snapchat has 265 million daily active users. On average, more than 4 billion Snaps are sent every day.

Snapchat is particularly popular with the younger generation, especially those under 16, leading to major privacy concerns among parents.

Snap’s Financials

Snap announced its financial results for its 2021 fiscal year (FY), which ended on Dec. 31, 2021, in early February. A net loss of $488.0 million was reported, a significant improvement from the net loss of $944.8 million in FY 2020. 

As a newer company with a focus on future growth, Snap’s net loss was not unexpected. Snap, however, recorded a positive net income for the first time since becoming a public company in the fourth quarter. Revenues rose 64.2% to $4.1 billion for the year.

The company derives 70% of its revenue from North America, which includes Mexico, the Caribbean, and Central America. In FY 2021, U.S. revenue alone amounted to 68% of total revenue. 

Two broad regional groupings are responsible for the remaining 30% of revenue: Europe (including Russia and Turkey) and other countries throughout the world, with the former group generating 16% of total revenue and the latter group accounting for 14% of total revenue. North America grew revenue at the fastest rate with 74.0% in FY 2021.

Snap Inc., the company behind Snap, celebrated its ten-year anniversary in 2020. It was founded in 2010 as a California limited liability company (LLC) named Future Freshman, LLC, before changing its name several times before settling on its current name in 2016. Snap went public in March 2017 with its IPO.

Comparing Q4 FY 2021 to the same quarter a year ago, Snap’s Daily Active Users (DAUs) and Average Revenue Per User (ARPU) both increased. In the fourth quarter, the company averaged 319 million DAUs over the three-month period, an increase of 20.4% over the same period last year. The ARPU for the quarter was $4.06, up from $3.44 in the year-ago quarter.

Snap’s Business Segments

There are no segments of Snap’s business that are disaggregated in the company’s financials. The majority of Snap’s revenue comes from its advertising business, which accounted for 99% of the company’s $4.1 billion in revenue in FY 2021, unchanged from 99% in FY 20209 Snap also generates a small and “non-significant” portion of its revenue from hardware products, including its Spectacles.

Snapchat Spectacles are glasses that connect to the Snapchat app and allow you to take Snaps and shoot videos. The latest version of Spectacles overlays the external physical world with augmented reality lenses.1 Snap’s earnings are not available because the company did not post a positive net income in FY 2021.

Snap’s camera app, Snapchat, is free to download for mobile devices. You can access all the features for free, including creating Snaps, conversing with family and friends, and discovering friends’ Stories with the Discover feature. 

User engagement is driven by these features, which in turn attract advertisers and drive revenue from advertising including Snap Ads and AR Ads.

The Snap Ads feature allows advertisers to tell stories the same way Snap users do while providing additional features such as long videos and the ability to visit the advertiser’s website or download the advertiser’s app.

Sponsored lenses and filters are included in ads from AR. Augmented reality experiences with brands are available through the former. This offers users the opportunity to interact with the advertiser’s brand through entertaining, artistic overlays.

Snapchat Demographics

From the beginning, Snapchat’s main population has been the Gen Z age group. In the App Store, the age rating is 12+.

In 2014, researchers from the College of Washington and Seattle Pacific College created a user survey to understand how and why the app was being used. The researchers originally hypothesized that Snapchat was primarily used for confidential content due to the ephemeral nature of the messages, including the much-discussed potential use for sexual content and sexting.

However, it appears that Snapchat is used for a variety of creative purposes that are not necessarily privacy-related. In the study, only 1.6% of respondents reported using Snapchat primarily for sexting, although 14.2% admitted to having sent sexual content via Snapchat at some point.

These results suggest that users do not appear to be using Snapchat for confidential content. Instead, Snapchat was primarily used for comedic content such as “silly faces.” 59.8% of respondents reported doing this more often.

The researchers also determined how Snapchat users do not use the app and what types of content they choose not to upload. They found that the majority of users are unwilling to upload content that is classified as sexting (74.8% of respondents) or content that is considered bad or offensive (93.7% of respondents).

The results of the study also suggest that Snapchat’s success is not due to its safety features, but because users find the app entertaining. The researchers found that users appear to be well aware (79.4% of respondents) that Snap Recovery is possible, and the majority of users (52.8% of respondents) report that it does not affect their behavior and use of Snapchat.

It was noted that many users (52.8% of respondents) use an arbitrary time limit for Snaps, regardless of the type of content or recipient. 

The rest of the respondents adjusted the duration of their Snaps depending on the content or recipient. Reasons for adjusting the duration of Snaps include the level of trust and rapport with the recipient, the time it takes to understand the Snap, and avoiding screenshots.

Snap Kit

In June 2018, Snapchat announced a new third-party development platform known as Snap Kit: a set of components that allow partners to offer third-party integrations with aspects of the service. The “Login Kit” is a social login platform that uses Snapchat accounts.

It has been promoted as more privacy-friendly than its competing counterparts, as the services can only obtain the user’s display name (and optionally a Bitmoji avatar) and are subject to a 90-day inactivity period, which prevents them from collecting any more personal information or social graphics through your consent.

The “Creative Kit” allows apps to create their own stickers to include in Snapchat posts. “Story Kit”

Snap Originals

In response to competition in the industry, Snapchat has diversified its content and introduced Snap Originals, episodic content. Series include scripted content and documentaries.

In June 2020, Snapchat announced the creation of its first “buyable” original show, “The Drop,” which will focus on “exclusive streetwear collaborations” from celebrities and designers. 

Each episode of “The Drop” will highlight the relationship between the designer and the celebrity collaborating.

Snap’s Recent Developments

Snap announced on March 1, 2022, that it was ceasing all advertising on its platform in Russia, Belarus, and Ukraine to combat media disinformation during Russia’s recent invasion of Ukraine. 

Additionally, the company said it was ceasing all advertising sales to all Russian and Belarusian entities and complying with all Russian sanctions.

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