As Reddit’s long-awaited IPO draws nearer, its push for ad dollars is intensifying.
With Reddit depending solely on ad sales for revenue, it’s no surprise that it’s trying to cozy up to more advertisers. Going public, which is expected to happen this month, heightens the urgency to satisfy shareholder expectations, compounding the pressure for revenue growth and expansion.
This urgency is reflected in Reddit’s jobs board, which currently lists 32 vacancies in its ad sales team across various markets and verticals.
It follows a well-trodden path of other platforms entering the public market, beefing up their ad sales teams to pitch agencies and advertisers for more ad dollars. A common strategy for these teams is hosting agency days to educate marketers about the platform, most recently with the likes of Publicis and IPG. Predictably, Reddit is following suit.
“The day included various sessions to upskill agencies, such as a creative session for planners as to why Reddit should be on a media plan and a chat with buyers to discuss ad formats,” said an agency exec who attended one of those events, but asked to remain anonymous because they were not authorized to speak to Digiday. “We also had a dialogue for them [Reddit] to better understand our clients’ needs, brand safety blockers and a meet and greet with various members of the senior team.”
Creating an IPO pathway
The key takeaway, as per the executive, was Reddit’s aggressive product roadmap, expected to unveil more details in the second quarter of 2024. The success of this roadmap will be pivotal for Reddit’s growth efforts; without compelling products, it can’t expect advertisers to engage.
While Reddit has stepped up its advertising efforts with initiatives like agency days, new products, and increased ad sales staff, it wasn’t stagnant before. In fact, the platform’s executives regularly engage with agencies on a monthly basis, tailoring discussions to suit clients’ needs, regardless of the upcoming IPO, two ad execs confirmed to Digiday.
“It feels like they [Reddit] want to partner and do some great work, rather than going after monetary value like other platforms do,” said Catherine Chappell, head of platforms and investment at Mediahub.
This is why the entry to some early testing of Reddit’s ad products has been lower than expected. As Chappell explained: “They [Reddit] believe getting that initial foot in the door showcases the potential of the platform,” she added.
Other communications, as Amy Rumpler, svp of search and social media services at Basis Technologies pointed out, tend to look like collateral around promotional periods as well as opportunities to connect with specific communities and conversations around topics such as March Madness — which isn’t exactly groundbreaking, given the ad spending incentives often seen from the likes of Meta or TikTok.
It’s an observation that underscores the challenge Reddit faces in carving out a big enough niche for itself in a competitive market.
Challenges ahead
Scaling an ads business isn’t easy. Time and again tech companies have often struggled to achieve true platform status, where the fluctuations in recurring revenue from advertising are balanced, to some extent, by the amount of it coming in.
Reddit is no different. Its S-1 form highlighted that the platform currently has 73 million daily active users. Compared to its peers, that’s a very small pool.
To compare, Meta recorded 3.19 billion daily active users (DAUs) across its family of apps, Snap highlighted its 414 million DAUs and Pinterest pointed out having 498 million monthly active users (MAUs) during the recent earnings calls. And although TikTok is a private company, Statista recorded the platform having 1.6 billion monthly active users as of January 2024.
Simply put, Reddit is subscale. So even if Reddit wanted to attempt to build more sophisticated advertising tools, it needs a volume of data on its users to build them.
Nevertheless, Reddit does appear to have a few advantages in its corner, although each comes with its own set of limitations.
While Reddit pushes contextual targeting, there are limitations
Reddit has made no secret of the fact that it’s all in on advertising, going so far as to call it the “foundation of our ad performance” in its S-1.
It’s a smart, if somewhat opportunistic stance, since contextual targeting is potentially a good alternative to behavioral targeting, given the increase in data and privacy regulations both in the U.S. and Europe.
But as independent analyst and investor Eric Seufert noted, with contextual advertising, marketers are always targeting groups of people rather than individuals — and the latter is naturally more accurate.
“There’s always going to be more precision and efficiency in targeting individuals that have some known characteristic, or some known proclivity, than targeting groups of people where some will and some won’t,” he said.
Take r/Camping or r/Outdoors; the example in Reddit’s S-1 form.
“These people may see an ad for camping gear, in context, within that conversation… Reddit’s unique community structure and interest-driven model acts as a strong signal for advertisers,” states the document.
But as Seufert pointed out, presence on a subreddit doesn’t give advertisers a lot of reliable actionable information around near term commercial intent. And Reddit can’t move beyond contextual unless it can build a feedback loop that attaches the behaviors to individuals.
“I don’t know that they can build the tech to do that because it’s a very expensive proposition,” Seufert added. “The bigger platforms have found ways around some of the privacy restrictions, or they’ve built privacy safe versions of their behavioral targeting tools, so Reddit can’t compete with them. And if Reddit couldn’t build these tools 15 years ago, when these restrictions weren’t in place, how could they possibly build them now that they are.”
This gets to arguably why measurement is going to be such an important factor in how Reddit’s ads business grows.
Reddit’s measurement capabilities
While the vast majority of advertisers wouldn’t prioritize Reddit in a social mix, the company’s S-1 form noted that during Q4 2023, “over 50% of our ad revenue was generated from advertisers with performance-oriented objectives.”
Which is surprising, given that most advertisers wouldn’t associate Reddit with being a performance driver, at least not in the same way they would Meta.
Efforts have been made to address these challenges. Last year, Reddit made significant strides in measurement by introducing brand and conversion lift tools. It also collaborated with partners to conduct research demonstrating how its ads deliver performance-oriented results for advertisers. Despite these efforts, there is evidently much more ground to cover.
“I don’t think Reddit is as proven of a performance driver as other platforms — so they’ll need to reinforce their own measurement solutions to help advertisers understand impact of investment in order to win dollars away from others,” said Rumpler.
But again, by going public, Reddit opens itself up to a new level of scrutiny that it didn’t have on its measurement capabilities before. “[Reddit] will have to demonstrably prove increases in ARPU and the only way to do that is to prove to brands that advertising on Reddit is a strong financial decision,” said Matt Voda, CEO of OptiMine.
Until then, Reddit will likely remain something of an afterthought for many advertisers.
Ability to increase revenue
Four of the ad execs Digiday caught up with for this article all agreed that for the most part, Reddit remains a tier two platform on social plans.
Of course, there are cases where Reddit is tier one, but they’re fewer and farther between, which creates a problem because that doesn’t translate to more ad dollars — and ultimately those ad dollars are needed to enable the business to evolve and scale.
Looking at the figures: the company’s S-1 form stated that it made $804 million in revenue for 2023, up 21% from $666.7 million in 2022. And EMARKETER forecasts that the business will record $832.6 million in global revenue by the end of 2024 (3.6% increase), and $1.02 billion by the end of 2025 (22.2% increase).
To compare: Meta recorded $134.90 billion and Snap achieved $4.6 billion in total revenue for 2023 according to their recent earnings. While it has been reported that for the first nine months of 2023, TikTok’s parent company ByteDance saw its revenue rise 40% to $84.4 billion.
But Reddit is self-aware enough to know this is an issue.
“We generate substantially all of our revenue from advertising,” the company stated in the S-1 form. “The failure to attract new advertisers, the loss of advertisers, or the reduction of or failure by advertisers to maintain or increase their advertising budgets would adversely affect our business.” Reddit did not respond to Digiday’s request for comment.
Relying so heavily on advertising for revenue is a tough spot to be in for any publicly-listed business as the last ad slowdown proved let alone one that doesn’t have a solid-enough relationship with large swathes of advertisers.
Clearly, strides have been made to bridge that gap, but there’s still a disconnect. There are many marketers who don’t know enough about Reddit to spend there — a problem probably compounded by the fact that Reddit’s agency relationships are still a work in progress.
“Overall agency communication comes from newsletters and trading conversations rather than alignment at the agency / opco level,” Chappell said. “One of my flags to them was that now we have client support nailed, we need to move forward and align Reddit with some of the agency frameworks and goals that we want to achieve as a business.”
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