Marketers Have 3 Big Problems With Snapchat

Snapchat is the new kid on the block in social media advertising. It only started selling ads at the beginning of 2015, but it's grown quickly, introducing several innovative ad formats and finding new ways to insert ads into its app. Last year, Snap (NYSE: SNAP) and its content partners sold about $404 million in ads, and analysts expect that number to rise to around $1 billion this year.

Snapchat's growth is fueled by its novelty and its popularity with millennials. But those factors will only get Snap so far. If it doesn't produce results for marketers, they'll eventually start looking elsewhere. Twitter (NYSE: TWTR) knows this firsthand, as a survey from RBC Capital and AdAge in September found more marketers plan to reduce spending on Twitter than increase spending.

The most recent version of that survey found Snapchat performing near the bottom of the list of social network advertising in terms of return on investment, which is a good indicator of whether marketers will continue to spend money with Snap. Here are the three biggest problems marketers have with Snapchat.

Image source: Snap/Author.

Lack of measurement

Snapchat offers basic measurement statistics through its various partners like Moat, which verifies how many people watched an ad and for how long. Both Twitter and Facebook (NASDAQ: FB) also partner with Moat for third-party measurement of video ads.

But Snapchat lacks detailed measurement statistics that allow marketers to optimize their ad spend. Twitter and Facebook have both introduced tools that allow marketers to run different ads at the same time and see which one performs better.

As Snap introduces more direct response advertisements on Snapchat, like app-install ads and web-view ads, measurement will become increasingly important. Big brand advertisers have processes in place to measure the impact of their campaigns across various media, but smaller direct-response advertisers don't. If Snap wants to capitalize on that lucrative market, it needs to improve measurement. Otherwise, it'll suffer the same fate as Twitter, which has failed to significantly penetrate the small-business direct-response market.

Poor targeting

Snap CEO Evan Spiegel thinks ads that are well targeted can be a bit "creepy." "We care about not being creepy. That's something that's really important to us," he said in 2015. That led Snap to eschew the same steps Facebook and Twitter took to improve their ad targeting, and explains why marketers feel it's lacking.

But Snap is finally coming around, realizing it's the only way to compete with the digital ad giants. In September, Snapchat rolled out several targeting features. It now allows advertisers to market to users who watch certain kinds of content (e.g., sports, beauty). It will also allow marketers to upload a list of current customer emails to target, and it can even target users that exhibit similar characteristics to those on the email list (i.e., lookalikes).

More recently, Snap partnered with Oracle Data Cloud to allow businesses to target users based on offline shopping habits tracked through various measures like loyalty cards. Twitter and Facebook both have similar partnerships, and Facebook developed its own targeting and measurement tool for offline purchases as well.

Declining ad engagement

One of Snap's biggest selling points in its S-1 filing is how well engaged its users are. The average user spends 25 to 30 minutes per day on Snapchat, and younger users spend over 30 minutes per day. That's extremely favorable compared to Twitter, which analysts estimate has very low engagement levels. It's even comparable to engagement across Facebook's portfolio of apps; Facebook says its users spend an average of 50 minutes per day across Facebook, Instagram, and Messenger.

But that app engagement isn't translating into ad engagement. A recent survey from Fluent found that 69% of Snapchat users skip ads "always" or "often." That number climbs to 80% for that younger audience Snapchat loves to boast about.

To be sure, Snap's more original ad formats like sponsored lenses are extremely engaging. Snap says Sponsored filters produce "3x higher brand awareness than mobile norms, as well as a 2x lift in purchase intent, on average." The only problem is that the ads are expensive both to buy and produce, and there's limited inventory.

Snap has a lot of work to do to make its ad products more appealing to marketers. Not to mention it's facing intense competition from Facebook and others, while user growth is slowing. Overall, the runway for revenue growth may be shorter than some expect if Snap's ads can't start producing better returns for marketers.

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Adam Levy has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. The Motley Fool has a disclosure policy.