- Snap's first earnings report disappointed investors, as the young company exhibited slowing user growth and hefty losses.
- Snap has focused on trying to land ad budgets from major, TV-centric marketers.
- Yet Snap has recently opened its ad products to smaller advertisers, a move that could prove crucial to accelerating revenue growth — but one that poses challenges.
Snap may need an assist from the underbelly of the web.
Because Snapchat's user growth has slowed, its parent company most likely needs to widen its advertiser pool if it wants to drive the kind of revenue growth investors would like to see.
That means it will have to make its peace with direct-response advertising.
The company said during its disappointing earnings call on Wednesday that 20% of its ads were being placed via programmatic channels. That's a promising start, since the more automated ad-buying available on Snapchat, the more demand it should attract.
And last week, Snap opened its ad systems to small businesses, which can now buy ads without having to talk to somebody at the company or hire a big ad agency.
Given the lackluster results, the pressure is on for that initiative to produce.
Snap has focused on TV ad budgets
It's a tough trick for Snap to pull off, as the company has taken pains to present its ad offerings as the "best ads in mobile" and comparable to TV. On the earnings call, executives talked up its audience data from Nielsen and big numbers for events like the Oscars and campaigns for Budweiser.
"We took a deliberate approach to start our business with the brand advertising," Imran Khan, Snap's chief strategy officer, said on the call. Snap declined to comment for this story.
That has made sense, as Snapchat is a terrific place to showcase custom vertical video ads for upcoming summer movies like the latest reboot of " The Mummy" or "King Arthur."
But it's also limiting. The secret to Facebook's and Google's ad dominance is that they don't rely solely on the few hundred advertisers who traditionally spend big on national TV ads. Instead, they work with millions of advertisers — everyone from the local plumber to those "buy this"- or "click here"-type ads for reduced mortgage rates and belly-fat reductions that permeate the web.
Some of those ads have started popping up on Snapchat. Yet there's no guarantee we'll see the floodgates open.
For one thing, the best advertising on Snapchat takes into account phones' vertical screens and the app's unique swipe-driven navigation. The average banner ad won't necessarily translate to the platform.
Plus, given its entertainment-oriented nature, Snapchat still has to prove it's a good vehicle for transactional advertising, said Andreas Reiffen, the CEO of Crealytics, a marketing technology company that works with retailers like Harrods and Asos.
Crealytics isn't buying ads on Snapchat yet because it is "simply not a direct-response marketing channel today," he said. "Many of our retail clients are not interested yet."
Following the Instagram playbook
They'd likely become more interested if other e-commerce brands started seeing success on Snapchat.
"We continue to invest in both DR and brand and continue to make the advertising business as frictionless as possible, which will help us to onboard many, many advertisers on the platform, which should bode well for our future advertising business," Khan said. "Our goal is to put the power of our ad products into the hands of every advertiser, regardless of their size."
The transition Snap will need to undergo is not unlike what Instagram experienced when it went from hand-selecting a limited number of ads that fit the app's photo-friendly aesthetic to opening its ad products to the masses, whether they ran pretty ads or not. It took a little while for direct-response brands like ParkWhiz and eBags to figure out Instagram, and now their ads are common on the app.
"I think the big issue with advertising over the next decade or so, frankly, is going to be education," Snap CEO Evan Spiegel said. "I think we have world-class ad units. They are delivering ROI. ... We've just got to keep showing people how Snap can really work for them and drive ROI."
Not everyone thinks that embracing a wider array of advertisers is in Snap's best interest. Will Margiloff, the CEO of the marketing technology firm IgnitionOne, said he didn't think direct-response ads fit Snapchat's nature — and that a sudden influx of such ads could make the platform less attractive to top marketers.
"I just hope they don't deviate from what they are just to juice their revenue under the pressure of being public," he said.