It hasn’t been an easy time for any investor in the stock market these last few months. The stock market had some of its worst-performing weeks since the 2008 recession; both small and big investors have been panicking over the tremendous losses. The tech sector has been one of the main losing sectors, primarily because of the change in consumer behavior, now that we are entering the post-COVID era. Companies like Facebook, Paypal, Google, and Amazon have all dramatically dropped in stock value; and SnapChat, which was at its highest price per stock at $83.11 back in September 2021, dropped all the way down to $13.58!! Snap’s stock price fell by a whopping 77% last year and shook up the entire tech industry. But the real question is, why?
On May 23rd, the CEO of Snap announced that they issued a warning stating, basically, that they are expecting to make less money from advertising. Doesn’t sound like that big of a deal at first, but it’s important to understand the shift the stock market is taking. During the COVID era, social media platforms experienced explosive, unheard-of, growth. Not only was traditional retail shut down, and people were forced to purchase online, but a lot of people also stayed at home and didn’t work. As a result, the time people spent on platforms, like SnapChat, increased to record highs. That meant that user growth was all that investors cared about, and it blew up the stock price. All was great until a market correction hovered over the market, and investors started wondering when these companies will leverage debt to create a growth plan to start producing real profit.
In the mix of all that stuff, two other significant things happened: Apple announced an IOS 14 user privacy-centric update, and the inflation rates rose to the highest numbers since 1982. Inflation doesn’t require any explanation, it’s a simple concept where goods become more expensive and prices go up; thus meaning people are forced to spend less and the cost to do business goes up. In return, advertisers need to cut the extra fat around their expenses, where possible. The second is Apple and the update that they issued to all their iPhone users; predominantly related to advertising, was the fact that users had to consent to app tracking. Meaning, apps, like SnapChat, are required to ask for the ability to track your activity when you are not on their app. Other changes include the amount of data they can collect, and share with advertisers, about users and how long they can track users after they interact with ads. In simple words, Apple made user privacy a choice and made user tracking a lot less abusive than it had become.
Evan Spiegel, the CEO of Snap, cited the reasons for the drop in revenue because of global economic macro reasons and the IOS updates; but for those who have been following and advertising, using SnapChat ads, it came as no surprise. The curtain fall should have happened long before the surprising announcement, and for those who are familiar with the SnapChat advertising platform, it was never a great advertising solution to begin with.
A Facebook ads Copycat –
Remember how Facebook ads stole and copied the idea of Stories? How one day you just woke up and suddenly it looked like SnapChat was part of Instagram? SnapChat wanted revenge and built their advertising platform suspiciously similar to Facebook ads. Both the system and layout looked extremely similar.
The fact that social media platforms copy each other shouldn’t be a surprise to anyone. The same thing happened with Tiktok, Google, and YouTube. The point here is that, by design, the advertising platform was intended to work based on the exact same logic. Find what users are interested in, based on what they browse for, both on and off the app; then, deliver to them personalized ads based on their browsing history. Because they can’t target what people are searching for, using Facebook browsing history to target the consumer’s interest is the second best option.They use a smart algorithm that uses machine learning to improve the ad delivery process so it becomes more precise, and effective, with time.
Targeting was set to be based on interests like Facebook ads; but with one big difference, a huge data hole and an extremely unstable, and inefficient, advertising delivery system.
Facebook officially launched ads in 2007. They have been collecting data and building up their data learning machines with, literally, no restrictions. SnapChat ads officially launched in 2014, but as invite-only; it really became open for self-service for all advertisers in 2018, even then it was somewhat limited. Snapchat was also always considered a privacy-centric social media platform, compared to the others; which meant that they also had a lot less data collected about their users to work with. Combining the lack of data, user privacy-centric model, and the fact that the advertising platform was a lot younger than the rivals at Facebook ads, it was no match. Most advertisers couldn’t get close to getting the same results that they were getting with Facebook ads. It’s also important to mention that, when Snap Ads were becoming more popular, it was also because Facebook ads were becoming less effective, and more restrictions were placed on advertisers; marketers looked for other places to put their advertising budgets, but SnapChat was never able to deliver. Even in some periods where the cost to advertise on the platform (CPM – cost per 1000 served impressions) was significantly lower on Snapchat than on platforms, like Facebook, the efficiency rate was much lower; this meant that you would still get a better cost per acquisition and better ROAS on Facebook, even if the cost to advertise was higher. It made sense to advertise on Snapchat to users who are only on Snapchat, but because of the lack of efficiency and the low result rate ratio it was, and still is, hard to find SnapChat ads that work as a growth channel for business.
The demographics that make the difference –
Another reason that Snap ads aren’t performing well for advertisers has to do with the demographics of users; particularly the younger subset. Similar to Tik Tok, Snapchat is more popular among the younger generation. The vast majority of Snap users are Gen Z, and then some millennials, which means that the most available and affordable audience to target is this particular group. Social media platforms worry a lot about not being able to attract a young audience and the next generation of users, but when it comes to advertising the story is quite different. Generally speaking, the most expensive age group to reach is somewhere between 25-40 years old. The reason being, is this age group is both financially independent and shops online very frequently. So if core users tend to be younger than 25 years old, and depend on their parents for financial help, they will purchase less and advertisers find it more challenging to produce profitable results from targeting that kind of demographic.
Less ad inventory –
Assuming that you have a newer advertising platform, even if your advertising system is less effective than your rivals, one way that you can attract advertisers is by offering a much cheaper place to advertise with cheaper advertising opportunities. Virtually all advertising platforms charge based on a system of online ad action that is set by the supply and demand of advertisers and is billed based on a unit of CPM (cost per 1000 served ad impressions). But, newer advertising platforms have fewer advertisers advertising and since the price depends on supply and demand, it can mean low cost to advertise. The problem with SnapChat is, they didn’t open enough ad inventory, to begin with. Their approach to ads was to open them up very slowly, and gradually, so it won’t impact user experience and user growth; it backfired, as the cost per impression wasn’t much cheaper than that of its bigger competitors and the only real benefit of advertising on SnapChat was to reach users who are only on SnapChat. Let’s be honest, no one really knows how many users there really are.
View-through conversions & Outrageous reporting-
I saved the most important for last. We can dedicate an entire article just to this point but, the problem is, it’s boring. I get surprised every time that I explain this concept and, most advertisers, don’t know what I am referring to. Truly astonishing. So let me explain it in simple terms.
Many of the conversions that Snap reports are called “view-through” conversions; this means if someone sees your ads, and doesn’t click but ends up making a purchase, Snapchat will report it as a conversion that they created. This is called return on ad spend (ROAS). Why is it a problem? Taking credit for a sale after displaying an ad to a user without getting a click, or a meaningful engagement, opens up the doors for companies like Snapchat to report back to advertisers results that they have limited impact on, and attribute to the success of their ads.
The real problem is that most advertisers use SnapChat as a secondary ad platform to platforms like Facebook or Google. This means that if you have 100 sales per day coming from your Google or Facebook campaigns, and you decide to add SnapChat ads, you might start seeing SnapChat taking credit for a chunk of the 100 sales. They don’t require users to click on the ad for it to count as a conversion they take credit for; all that they need to do to take credit is show an ad impression between the time someone visited a website and made a purchase. If you have existing sales, and you start advertising on Snapchat, you will probably notice that your ads on Snapchat are reporting really great results; it will especially surprise you when you try to cross-reference those reported results with another source, such as Google Analytics or your store dashboard, you won’t find the same results. It’s relatively easy for an algorithm to learn when users or website visitors are likely to make a purchase after visiting for the first time, and display an ad to them before that happens. I know it might sound like a conspiracy theory, and might sound like the opposite from what a platform like Snapchat wants to do for advertisers, but it’s important to understand that their only goal is to grow its revenue from advertising. If you are an advertising platform, the best way that you can get advertisers to spend more money is to report that you are generating a lot of revenue and results for them.
When a platform builds its advertising solution based on optimizing towards events that don’t require a meaningful connection between the users and advertisers for the sake of more positive ad reporting, it works against its long-term objective of actually building a solution that creates real growth and generates real revenue for businesses, and not just artificial results. This leads to a very quick turnaround, where advertisers quickly realize that some of these results might be too good to be true, then they reallocate funds to other, more steady and proven, advertising sources.
My friends who work at SnapChat quickly dismissed this claim saying that SnapChat, in general, is a no-click platform where users mostly swipe and don’t click on anything when they spend time on the platform. That’s why they claim that, if the user made a purchase or conversion after they saw a SnapChat ad, SnapChat probably contributed to it. They also point out that you can view your reports with very limited view-through attribution windows, like one hour, to only include conversions that happened within that one hour (or even excluding it completely) after seeing an ad, and relying on that report instead.
My response to this is, when you cancel out view-through attributions you will see an enormous negative difference in your ad performance and it will make you question the value of advertising on SnapChat. In addition, even if you don’t want to see view-through conversions in your reports, the algorithm will still try to optimize to get that kind of conversion in addition to click-through conversions. So instead of focusing solely on generating meaningful conversions through SnapChat, it will also look for opportunities to generate conversions from users that don’t result in a click.
A return on ad spend should mean a “real return” that has been created and produced by the advertising platform, and not a return on ad spend that has been credited after someone “viewed” an ad and ended up making a purchase, or a conversion, anyways. .
The fact that SnapChat developed their advertising platform around these types of metrics and goals, contributed to the fact that it’s a low-performance advertising solution that is better at attributing and reporting results to advertisers than actually delivering them.
Trimming down the extra fat from marketing budgets
The CEO of Snapchat was partially right about one thing, the macro impact on advertising spending. It’s no secret that 2022 brought a dramatic slowdown in online consumer spending which forces advertisers to rethink their marketing budgets and cut down overall spending on advertising. When advertisers need to prioritize spending, they first look at where they can cut down spending. That’s exactly when companies, like Snapchat, experience a sharp decline in revenue; because advertisers that used them as a secondary, or a smaller additional source, for paid traffic, start cutting down spending due to budget cuts. That’s why much of the slowdown that Snapchat experienced recently has nothing to do with the number of active users on their platform, it’s simply a matter of advertising pulling back spending on the platform.
Snapchat has experienced its worst year since the company first became public. The global economy, the rising inflation, and the software updates introduced by Apple caused turmoil for Snapchat, and have shaken up the entire industry. But it’s important to remember that Snapchat never really managed to develop a good product for its advertisers. Instead of focusing on developing effective advertising solutions that provide sustainable, meaningful, and verifiable results, it seems their focus was primarily on how their results would be perceived by their advertisers to encourage advertisers to put more money, in the short term, into their platform instead of developing something that is built to last.
Snapchat ads have now been running for a good number of years and unless something changes dramatically, like a substantial drop in the cost to advertise, or a real change in the ad delivery process; I don’t think things will get any better for Snapchat advertisers anytime soon.
Do you remember hating when someone else stole your work at school? SnapChat is doing something suspiciously similar with advertisements businesses put on their platform. They provide an inflated view of how their advertising platform “helps” your business through the use of view-through conversions, rather than client engagement. Thus taking credit for views and purchases not made through their platform, but within a certain time frame of seeing your ad. I’m double checking the math and it doesn’t add up, or bode well for SnapChat’s advertising future.