There’s a fun little section in the Snap Inc. IPO filing titled “Why We Sell Ads.” It’s odd, in a way, that Snap should have to explain this in the first place—advertising is the company’s primary source of revenue, after all. Yet it starts with a candid admission that “When we first started building Snapchat, we didn’t know how it would make money.”
Like so many other tech companies, Snap focused on creating fun ways for people to share pictures on smartphones. The product was new, and it wasn’t clear how to build a business around it, the statement continues. But soon the startup realized that “we needed to start monetizing—and fast. Our server bills were getting expensive.”
At first the company figured people would buy creative tools so that they could have more ways to, for instance, draw captions on their pictures. So it opened a Lens Store at the end of 2015, with each lens costing just 99 cents. But the results were disappointing. Snap closed the store after just two months, in January 2016, and made all the Lenses free.
That’s the moment when the Snapchat community began creating a lot more Snaps:
“We learned that asking users to pay for Creative Tools was a bad idea. It meant introducing more friction into the process of self-expression, which was the opposite of what we wanted on Snapchat. We also learned something exciting about building new products: if we built more Creative Tools and made them available to everyone for free, our users would create more Snaps and spend more time on Snapchat.”
And that’s how Snap came up with advertiser-backed creative tools—sponsored Lenses and Geofilters. Today’s IPO filing also revealed that Snap’s 2016 revenue was $404.5 million, and its global average revenue per user, or ARPU, was $1.05.