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Why Snapchat's advertising strategy is 'genius'

Melody Hahm
Senior Writer

You may not be aware of it, but brands are getting tons of ordinary people to advertise their stuff — whether it’s Gatorade or tacos — for free. And it’s happening on Snapchat.

Snap Inc., Snapchat’s parent company, has filed confidentially for its initial public offering, Reuters reported Tuesday. The ephemeral photo-messaging app filed IPO papers with the US Securities and Exchange Commission (SEC) before the US presidential election. Under the Jumpstart Our Business Startups (JOBS) Act, companies with revenue less than $1 billion can file for their IPO privately.

Snapchat sponsored lenses, Delmondo

Advertisers have quickly realized the colossal opportunity to tap into young minds and their wallets, given that so many millennials use the app. Marketers have expressed their desire to advertise on Snapchat and take advantage of its large audience of notoriously hard-to-reach millennials. In fact, more than 50% claimed to have interest, according to an RBC Capital Markets’ report from last month.

Snapchat offers a wide array of lenses that can transform your boring selfie into a voice-changing deer, or give you a Coachella flower headband. The company, in an effort to monetize this playful feature, has given brands an opportunity to create their own sponsored lenses. By partnering with brands like Spotify, Kraft and bareMinerals, the company enables users to interact with advertisers directly.

“The genius behind the sponsored lens is that Snapchat has created an advertising product that people actually want to see, use, and share,” notes Jefferies’ US internet research team. Take, for instance, Taco Bell’s (YUM) sponsored lens that turned a user’s head into a giant taco shell. The lens was viewed 224 million times in one day, and Snapchat users interacted with the lens for an average of 24 seconds before sharing it with their friends.

Earlier this year, longtime venture capitalist Mary Meeker noted that it’s precisely these branded lenses that are clicking with users. In addition to Taco Bell’s successful Cinco de Mayo lens, the Super Bowl lens sponsored by Gatorade (PEP) on February 7 garnered 165 million views on Snapchat, according to Meeker.

Of course, this reach comes at a price. The cost for sponsored lenses varies depending on the day of the week, whether it’s a holiday and current trends, according to Wallaroo Media. Generally, sponsored lenses cost $450,000 per day Sunday through Thursday, $500,000 for Fridays and Saturdays, and upwards of $700,000 for holidays or special events (like the Super Bowl).

But, with Snapchat reaching 41% of all 18- to 34-year-olds in the US every single day, this is likely a worthwhile investment for large companies.

Indeed, Gatorade’s senior director of consumer engagement said its Super Bowl lens “exceeded all of [their] expectations.”

These lenses are a core part of Snapchat’s revenue stream, which is expected to reach close to $1 billion next year. Snapchat has already surpassed Twitter (TWTR) in daily active users, and 150 million people use the social media app every day, according to Bloomberg. That’s 150 million people who are playing around with various filters to send their ephemeral selfies (compared to Twitter’s 140 million).

More users watched the MTV video music awards on the platform than on TV, notes Meeker.

Twelve million people watched MTV’s live Snapchat story while only 9.8 million tuned in to the broadcast.

The lenses are increasingly popular, precisely because the filters are always tied to a specific event or occasion, but are positioned in a playful way so that users are often unaware (or frankly, don’t care) that they’re participating in a free advertisement for the brand.

Snapchat has broader use cases than for brands looking to push their products to teens. It’s actually changing the way people are getting hired. JPMorgan (JPM) has started using the app to recruit analysts by launching their own geofilters.

Snapchat also has a bright future with up-and-coming consumers, too. It was the first social networking site that Gen Zers started using, according to a research note from Bank of America Merrill Lynch. They will account for 40% of all customers by 2020. This translates to endless opportunities for young consumers to give brands free advertisements to their friends. It’s a strategy that even Instagram and Facebook (FB) have been unable to master.

Melody Hahm is a writer at Yahoo Finance.

Read more from Melody here & follow her on Twitter @melodyhahm.