Snap’s Unique Strategy to Monetize Augmented Reality

You’ve probably seen those cutesy Snapchat pictures of people getting a ring of colorful flowers on their heads or having their facial features morph into a lovable dog. 

Snap Inc., parent of Snapchat, has now devised a clever way to generate revenue from this form of augmented reality (“AR”).  It is offering potential advertisers the opportunity to customize “lenses” to superimpose company logos on peoples’ photos and videos.

The first campaign centered around the release of The Peanuts Movie in 2015. People could choose a special Snap lens to take pictures of someone posing with Snoopy and then send to friends and family—all while promoting the new movie. Subsequent attention-getting campaigns included being able to pour a bucket of Gatorade on top of a Snap subject’s head to promote the Super Bowl (165 million views) and celebrating Cinco de Mayo by turning people’s heads into a giant Taco Bell taco (224 million views).

Spots typically take several weeks to create and are only live for 24 hours; they cost anywhere from $300,000 on up each. However, Snap is working on shortening the development time as well as offering the service on a more targeted basis with respect to geography and demographics. Snap’s AR advertising strategy is seen as both a viable way to compete with Facebook and reach the burgeoning 18-24 year old market.

The company estimates that the 166 million daily users of Snapchat create 3 billion Snaps each day. Advertisers are enthusiastic over the fact that 30% of them use the lens feature, and the average user fools around with a sponsored lens for 15 seconds before sending it.

The promotional lens program certainly offers promise. Snap had $50 million in revenue in 2015 and is expected to reach $1 billion in 2017. Will this type of revenue stream impact Snap Inc.’s long-term liquidity—particularly after its recent highly publicized IPO?