According to Fortune, Snapchat is worth about $19 billion. For many people, this is absurd. It's absurd because Snapchat, while popular, struggles to make any actual revenue. However, they have changed the direct medium advertising in the digital age, and in the long-term it may make them profitable.
There are a number of reasons why this is the case. Nevertheless, it relies on their ability to implement a comprehensive revenue generating policy that doesn't annoy existing users.
Is it Worth Anything at All?
When Snapchat rejected a $3 billion offer from Facebook, the Internet thought the company was crazy. They had never made any money and had the balls to turn down a tangible offer from one of the tech giants. However, Alibaba has been in talks with Snapchat over a potential $10 billion investment.
Alibaba aren't stupid. They are the Chinese version of Amazon. Ideas are what sell in the tech industry, rather than genuine revenue.
What it generates isn't relevant, at least for now. But one day it has to start building up a revenue stream. It goes without saying that it can't work this way forever.
The easiest way for Snapchat to become profitable is to sell advertising. It already has managed to sell advertising. In summer of 2015, it sold about eight ads through the platform. It managed to make about $8 million from this.
This is a comparatively low number, and it certainly hasn't managed to hit profitability because of that, but what it shows is that the company can successfully run ads and make a profit.
Reaching the Coveted Demographic
Advertisers have always had problems reaching the coveted teenager demographic. These are the people who are most likely to burn money on impulse buys. It's also one of the few areas where advertisers have failed to have any reach whatsoever.
Part of the reason for this is due to ad blindness. Many young people simply don't see the ads any longer. They may have a blocker installed or they have become numb to it. The ads don't register in their field of vision, thus making them useless.
Snapchat is mainly used by teenagers. The average user may send 25-30 snaps per day. This provides advertisers with huge potential for advertising.
Turning Users Away
The issue with advertising on Snapchat is the audience. The story of Snapchat is one that has managed to capture a notoriously picky audience. However, by introducing advertising on a mass scale it could become the catalyst for turning users away.
This is one of the reasons why Facebook managed to lose so many of their younger demographic. Granted, it didn't hurt them in any way, but it demonstrated a serious issue experienced by many similar companies. Young people don't like advertising.
There could be a chance that Snapchat shoots itself in the foot through relying heavily on ads.
The Japanese Route
Japanese mobile chatting platform Line is essentially Snapchat in Japan. Leaked news reveals that Snapchat has lifted many of the revenue generating ideas from this app. This includes using purchasable stickers within the app and paid games.
Purchasable items have long been on the cards. The reason why this could work is because teenagers like bright and shiny objects. There's no obligation to buy these items, as there is to view ads. Teenagers are getting something they actually want.
This could help Snapchat preserve its key demographic, while still making revenue.
The only question is whether in-app purchases can provide the revenue needed to help the company justify its huge appraisals.
Could a Subscription Work?
A common scenario is a company will install ads and then provide a subscription-based version of the app to remove said ads. It's essentially putting both revenue generating ideas against each other. The issue is whether a subscription would take off.
The vast majority of teenagers likely wouldn't pay to use an app that has been free in the past. It could further open the door for competitors, or turn them towards main competitor Whatsapp.
Snapchat would likely have little to gain from a subscription-based package. Nevertheless, there's no reason why it couldn't make it available in order to start generating some revenue.
Can Snapchat Become Profitable?
There's no doubt that Snapchat has the power to become profitable. The issue is over whether it can implement traditional income streams without alienating its main audience. Facebook could afford to alienate young people because they had appeal across all demographics. This has never been the case with Snapchat, thus making its position risky.