Customer-obsessed marketing

Go Ahead, Freak Out About Snap’s Earnings- For The Right Reasons

Melissa Parrish
Vice President, Research Director
November 9, 2017

The sky is falling, right on top of Snap Inc, and the sky’s name is CPM. Since they launched their self-service, auction-based buying environment, CPMs plunged 60%.  60%!?!?!?  Cue the panic, right?

Not so fast. With companies like Facebook making up the competitive set, the pressure was always on Snap to not just post good results, but to crush it consistently.  And a 60% decline in anything sounds pretty freakin’ bad.  But this isn’t a 60% decline in just anything. It’s a 60% decline in ad CPMs as a result of just what the financial markets are supposed to track: market forces.

Snap, like nearly every publisher or platform that started out in traditional or otherwise non-programmatic advertising models, moved from a fairly opaque direct sales model where advertisers paid whatever Snap told them they should, to a model where advertisers got to serve themselves and set the maximum price they’re willing to pay for Snap’s inventory. Prior to going auction-based, publishers and platforms set their CPMs based on their own perceived value of the context they deliver. However, advertisers want the cheapest media they can get—no matter how much we all crow about quality and context– so they’re not bidding top-of-the-line CPMs right out of the gate. The market sets the price.  Anybody who didn’t expect CPMs to come down precipitously when Snap moved to a programmatic model hasn’t been paying attention.

There are lots of good things that can and should happen from here. First, if advertisers see clear value from the performance of these programmatically bought ads, Snap should be able to attract tons of smaller advertisers who can now afford the lower CPMs. And as Facebook has certainly demonstrated, revenue can add up quickly when you’ve got millions of small advertisers. Then, Snap will have more advertisers vying for limited ad space and the laws of supply and demand will kick in, driving CPMs back up for the highest-quality, best-performing inventory.

So is the 60% drop in CPMs alone a sensible reason to freak out? No. However, that programmatic model relies on a large audience to support growing CPMs—targeting is one of the things that makes inventory high-quality and therefore more expensive, and you have to have a large audience to make targeting meaningful. And today, Snap’s user-base is not sufficiently on the rise.  That’s why their decision to redesign the Snapchat app and solve the user experience issues makes sense: Snap believes it will make the app appeal to a wider audience.

But here is where advertising numbers and design may not turn everything around given the expectations Snap faces. Solving the how-to-use-Snapchat problem will reveal if there’s an even bigger barrier to entry for new users: why to use it.  Snap created something that appeals to people who communicate in a distinct way—most, but not all, of whom are comparatively quite young– and it’s possible that there just aren’t billions of people on the planet who can be convinced to do so.

So don’t worry about the 60% drop in CPMs.  That’s unfortunate but normal. Worry about possibly solving the wrong product problem. Worry about moving to a business model that might not support the best use case for the product. And worry about the impossible expectation that every user-focused tech company will become the next Facebook.

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