The photo messaging service Snapchat has suddenly become the hottest app in the tech world. The two-year-old startup was offered a reported $3 billion cash buyout from Facebook last week, but turned it down. People were shocked not only that Facebook offered triple what it paid for Instagram just two years ago, but also that 23-year-old Snapchat CEO Evan Spiegel would have the audacity to not cash out like Instagram CEO Kevin Systrom did.
Either Spiegel is applying his best poker face to his Silicon Valley suitors in order to force an even pricier buyout, or he’s got a plan to make the app even bigger than a $3 billion business. Right now, Snapchat generates no revenue, and estimates of the size of its user base vary wildly. The only relevant growth metric the company has disclosed is that users receive 400 million photos and videos (called “snaps”) each day, a number that has increased quickly during 2013.
Still, it’s not exactly clear how Snapchat will transform the voracious use of its app by teenagers into actual dollars. Most of its content disappears within ten seconds, and users offer up less personal data than they give to Facebook or Twitter. If the app hopes to scale to the level of those publicly traded social companies, it will likely need a variety of revenue sources. Here are five ways Snapchat could make enough money to make good on its sky-high valuation:
A Subscription Model
This may sound old-fashioned, but Snapchat could just charge people directly to use its service. Some mobile startups are doing this successfully. WhatsApp, a popular messaging service based in Silicon Valley, charges customers a $0.99 annual subscription fee after the first year of use. The company hasn’t disclosed revenue figures, but it now boasts more than 350 million monthly active users, dwarfing even the most generous Snapchat user base estimates. It’s staying afloat in a competitive field without selling advertising or peddling in-app purchases to users—for now.
Flash sales, in which products are offered at a discount for a short period of time, are already a hot trend in e-commerce. Snapchat could offer a more extreme version in which sales last ten seconds instead of 24 hours. 16 Handles, a frozen yogurt chain in New York City, has already experimented with the format. Users sent photos of themselves in front of one of the yogurt shops to the company’s Snapchat account, then were rewarded with coupons that lasted only ten seconds before disappearing. These types of discounts (Snapchat’s creators call them “exploding coupons”) could capitalize on shoppers’ desire to never squander a good deal.
Snapchat currently straddles a line between messaging apps and social networks, but it could easily adopt a similar advertising strategy as Facebook or Twitter. Brands could pay to send sponsored snaps to users, either attached to photos people are already sending or as separate messages. The format could be an effective way to generate excitement about new products or movies. Already Taco Bell has used Snapchat to provide people a sneak peek at upcoming menu items, like the Beefy Crunch Burrito back in May. Recently Snapchat introduced a new feature, dubbed Snapchat Stories, that allows users to save photos for 24 hours and connect them to create an overarching visual narrative. This format, which would allow for promotions more similar to those on other social networks, could be especially appealing to advertisers.
Emojis (and Other In-App Extras)
Snapchat CEO Evan Spiegel has already said the company is planning to introduce in-app purchases of some kind. In other messaging apps, these are often message add-ons like emojis (the cute smiley face characters you’ve been using since the AIM days). Don’t doubt that people will cough up money for such extras. Line, a popular messaging app based in Japan with more than 200 million registered users, generated more than $25 million in the second quarter of this year selling stickers and emojis to users. Snapchat might offer photo filters, emojis or other flourishes to allow users to tweak their snaps. “Self expression is a big part of what the chat apps are about,” explains Brian Blau, research director in consumer technologies at Gartner.
The Candy Crush Approach
The biggest gamble—but perhaps the most lucrative—would be to tie micro-payments into Snapchat’s core functionality. Many mobile apps, particularly addictive games like Candy Crush Saga, have shifted to a freemium model in which users can download the app for free but are goaded into paying as they use the app more frequently. In Candy Crush, for example, players are locked out of the game for 30 minutes if they lose five times, but they can pay 99 cents to keep playing immediately. Snapchat might adapt a similar model by limiting the number of free snaps users can send per day or letting people send snaps that last longer than ten seconds for an extra fee. “That is a better way of monetizing than simply charging for an outright service,” Blau says. “It’s something that will hook users because it sort of plays on their emotions.”