How Does Snapchat Make Money?

By Markets Fool.com


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Image source: Snapchat.

With its recent follow-on offering, Snapchat is reportedly valued at $20 billion.

That's nearly double the value of Twitter , arguably the most high-profile social media giant to IPO in recent years.

Its CEO has signaled he plans on an eventual Snapchat IPO, so with the company's focus shifted toward monetization and revenue growth in coming years, let's review how Snapchat plans to make ever-greater sums of money in the years to come.

How does Snapchat make money?

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Though very much in flux, co-founder and CEO Evan Spiegel has previously described Snapchat's business model as having three distinct points of monetization: camera, content, and communication.

In terms of monetizing its camera interface, Snapchat has developed a branded geofilters business, which gives individuals and businesses the opportunity to purchase filters inside Snapchat's popular stickers section. For example, the recent X-Men: Apocalypse film paid to have branded X-Men filters take over Snapchat in the run-up to its launch. This campaign reportedly also included the functionality for users to swipe the filters to purchase tickets, which adds an e-commerce opportunity from which Snapchat could derive revenue.

Here's another example of a sponsored filter from the most recent Hunger Games movie:


Image source: Snapchat.

In addition to these mass-market promotional campaigns, Snapchat also allows users to purchase sponsored filters covering smaller geographic areas. A friend of mine recently purchased one to cover the one-block area around the bar where he held his going-away party in New York City, where I live. This in some ways mimics how other social media giants like Facebook appeal to advertisers (or partiers, as it was in this case) both large and small.

Turning to media content, Snapchat launched its Discover functionality in January 2015,which allows major media outlets to push short-form content onto Snapchat for its video-hungry masses. It isn't clear how much revenue Snapchat generates from this business, but content distribution has already emerged as an obvious monetization point as Snapchat continues to grow its revenue.

The last -- and least defined -- area of Snapchat's business is communication. At present, Snapchat has no direct way for companies to connect with consumers via Snapchat's popular chat function, though a broader industry trend suggests an opportunity exists. As just one example, Facebook-owned WhatsApp and Facebook Messenger have both rolled out products that enable companies' customer service communications to flow through their services, rather than exist online or over the phone. Again, Snapchat's plans aren't clear, but Spiegel specifically mentioning communication as a piece of Snapchat's business model suggests it plans to monetize this popular part of its platform at some point in the future.

Snapchat's road to $1 billion in revenue

Snapchat's shift to prioritize revenue growth could produce surprising results sooner than many observers might realize. According to a recent investor presentation viewed by TechCrunch, Snapchat has told investors it expects 2016 revenue to fall between $250 million and $350 million, up from a reported $50 million in 2015.

However, with the full effect of its nascent monetization efforts continuing to scale, Snapchat has told investors it expects 2017 revenues to increase to between $500 million and $1 billion, an impressive figure for a company that launched in mid-2011. As a point of comparison for Snapchat's sales growth, it took Facebooksix years to top $1 billionin sales. Twitterneeded eight years.

Many have questioned Snapchat's place as one of the most valuable start-ups in the world. But implausible as it might seem to those unfamiliar with it, Snapchat has a clear plan in place to make good on its valuation -- sooner, perhaps, than many realize.

The article How Does Snapchat Make Money? originally appeared on Fool.com.

Andrew Tonner has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.