instagram-business-model

How Does Instagram Make Money? Instagram Business Model In A Nutshell

Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc. overall business model. Acquired by Facebook for a billion dollar in 2012, today Instagram is integrated into the overall Facebook business strategy. In 2018, Instagram founders, Kevin Systrom and Mike Krieger, left the company, as Facebook pushed toward tighter integration of the two platforms.

Instagram background story

Instagram has been one of the most successful startup stories of the last decade. It quickly turned into a multi-billion dollar company, with millions of users. It is worth exploring some key facts that surround its story, as it will show how what in startup lingo is called “pivoting” or changing course (but it really just means understanding what people want and what problem they’re experiencing that you can solve) is critical to get your startup off the ground!

Speed of execution and pivoting by keeping it simple

Before Instagram would become one of the fastest growing apps in the world, it was called Burbn. Kevin Systrom had secured an investment, which allowed him to focus on that app for a few months. Mike Krieger – which would also become Instagram co-founder – was a power user of Burbn, and so he joined Kevin Systrom to get Burbn off the ground. However, after a few months, the whole project seemed doomed. 

As Kevin Systrom pointed out on an Interview for the Tim Ferris Show

We decided to pivot, and this is where keeping it simple comes in. We actually got to the idea for Instagram by taking away features from Burbn, not by changing it all. A bunch of the features of Burbn: one, you could check in at a place, but two, you could add a photo of what you were doing at that place.

and he went on:

It turns out people kind of liked the check-ins; they thought it was pretty lame because it was a “me too” thing, but they loved showing people what they were doing. They loved taking a picture of the bar, the restaurant, the whatever. We realized to keep it simple, we were going to have to cut every other feature of Burbn — which we did — and we just kept the photo part.

Thus, rather than keep focusing on all the features that the app offered. Kevin Systrom and Mike Krieger circled down to a very few basic features that would make the app special.

And then it came to the idea that would transform Burbn, into Instagram. Systrom was exhausted as he struggled to get the app off the ground. And while on vacation, he was having a walk with his wife. On the walk, he asked her, why she thought the app wasn’t exciting. As pointed out in the Tim Feris Show interview, Systrom’s wife said:

I don’t think I’m going to use it because my photos aren’t that good.

Systrom remarked to his wife:

Why don’t you think your photos are good?

And his wife replied: 

Well, all your friends post these amazing photos and they’re all filtered and stuff.

Systrom swiftly replied: 

That’s because they use filters!

And so his wife said:

Well, you should probably add filters!

As soon as back to their room, Systrom added the first Burbn filter:  X-Pro II. 

A big hairy audacious goal

As Kevin Systrome, founder of Instagram pointed out in one of the first Instagram posts:

When we started working on Instagram, we tried to imagine what the world would be like if everyone could contribute media to an open, transparent, and international community.

This was at a time when Instagram had 80 users! When Systrome announced the photo app in October 2010, he communicated three key problems Instagram was trying to solve:

welcome-to-instagram

Source: instagram.tumblr.com

As soon as Instagram launched it reported explosive growth. As Systrom, Instagram founder recounted: “We crossed 10,000 users within hours, and I was like, ‘this is the best day of my life.’ This is amazing, right?” he said. “At the end of the day, it kept growing so much I thought, ‘are we counting wrong?'”

Problem/solution fit

When Instagram launched it was solving three key problems at the time:

  • At the time phone cameras hadn’t the resolution they have today. And Instagram made it possible to transform low-quality pictures by supercharging them with filters
  • The company built upon the concept of social media, which had already proved successful, and improved on it by curving its own niche, photo-sharing
  • It focused on making the platform easy and smooth for users, which allowed them to upload photos quickly and integrate them within other social media platforms

Note: A successful startup has to understand first what’s the problem it needs to solve. In most cases, companies fail to achieve success, because they lack the understanding of the problem. Rather they focus on the solution, as pointed out in the interview I had with Ash Maurya. Therefore, it is important to move from a position of product/market fit, which makes you focus on the product and features you can offer. To a position of problem/solution fit where you actually focus on the definition of the problem, and then, only once you have validated the problem, you focus on the product and its features.

By September 2011 Instagram would reach 10 million users! By the end of 2011, Instagram would reach 15 million users, and its engagement kept growing.

Facebook acquisition and integration

If there is one strategy Facebook‘s Marck Zuckerberg has mastered over the years is the acquisition of wildly successful products to integrate within Facebook.

Facebook acquired Instagram for $1 billion in 2012. As pointed out by the NY Times at the time “It’s a notable move for Facebook, which has exclusively focused on bite-size acquisitions, worth less than $100 million.”

At the time Facebook wasn’t that strong on mobile, and the move to acquire Instagram made perfect sense from that standpoint. As pointed out by Mark Zuckerberg at the time:

For years, we’ve focused on building the best experience for sharing photos with your friends and family. Now, we’ll be able to work even more closely with the Instagram team to also offer the best experiences for sharing beautiful mobile photos with people based on your interests.

That’s why we’re committed to building and growing Instagram independently. Millions of people around the world love the Instagram app and the brand associated with it, and our goal is to help spread this app and brand to even more people.

On a separate note on the Instagram blog, in April 2012, Kevin Systrome announced:

When Mike and I started Instagram nearly two years ago, we set out to change and improve the way the world communicates and shares. We’ve had an amazing time watching Instagram grow into a vibrant community of people from all around the globe. Today, we couldn’t be happier to announce that Instagram has agreed to be acquired by Facebook……It’s important to be clear that Instagram is not going away. We’ll be working with Facebook to evolve Instagram and build the network. We’ll continue to add new features to the product and find new ways to create a better mobile photos experience. 

Just as happened with WhatsApp not long after the acquisition, Instagram changed its privacy policy to allow integration with Facebook products.

The most important component of the Facebook business model is its advertising machine. Thus, the first and critical step Facebook took when buying Instagram was to gradually integrate its advertising network within Instagram.

Indeed, only in 2015, ads would be widely available on Instagram. For an organization, coming up with a sustainable revenue model that can be integrated into its overall business model is a critical step. And Facebook completed successfully this transition between 2015-2016.

Facebook goes all in with Instagram

facebook-advertising-revenues

The integration between Facebook and Instagram proved so successful, that by 2018, Facebook, which makes most of its money from advertising revenues also transitioned successfully to mobile. Which as of 2018, represented 92% of Facebook advertising revenues!

We don’t know exactly how much of those revenues were coming from Instagram, but Recode argues that Facebook might soon rely on the majority of its revenues from Instagram.

Zuckerberg takes over

Fast forward 2018, as Systrome pointed out on a blog post:

We’re planning on leaving Instagram to explore our curiosity and creativity again. Building new things requires that we step back, understand what inspires us and match that with what the world needs; that’s what we plan to do.

While there was no confirmation from Systrom on a clash with Zuckerberg, Bloomberg reported:
Lately, they were frustrated with an uptick in day-to-day involvement by Zuckerberg, who has become more reliant on Instagram in planning for Facebook’s future

Thus, this move makes it clear that Facebook and Instagram were to become tightly integrated.

Instagram mission, and key partners

Our mission is to bring you closer to the people and things you love.

Thus, Instagram emphasizes on creating relationships through visual storytelling. This is the primary payoff for users. However, as Instagram makes money through advertising, it also promises to businesses, willing to advertise on the platform to get “proven results” on the platform.

content"}”>Therefore, we have three primary payoffs for each of its key partners:

  • content"}”>Users: build relationships through visual storytelling
  • content"}”>Businesses: advertising their brands and products
  • content"}”>There is also a third persona that is a key partner for the Instagram business model, which is a power user or the so-called influencer. What does the influencer get? The payoff for the influencer is the ability to build a following that can be resold to businesses ad campaigns to promote their brands

Why influencers matter so much to Instagram overall business strategy?

Instagram is among those digital platforms which mastered and automated the creation of content. It did that both via algorithms (like feed algorithms, automated algorithms able to scale content recommendation, filtering, spamming and so on); and via user-generated content.

User-generated content is the key ingredient of the long-term success for platforms like Instagram, Pinterest, Facebook, Quora, Twitter, and many others. However, while the average user produces mediocre content (which still matters for the ongoing engagement of people on the platform).

There is a power user, the influencer – become a digital profession for many – able to produce higher quality content, for free, for the platform. Thus, the user-generated content produced by the influencers gains strategic and critical importance.

The, it is then important to understand the relationship between the digital platform (Instagram) and the influencer. While influencers with a monetizable following do make money with their content by selling sponsored posts and campaigns on their profiles. Instagram was not able to capture directly that value.

But as the platform grew it offered functionalities, like “swipe ups” that enabled influencers to monetize their following, by tracking the actions people take on their content.

To understand how Instagram capitalized on that we need to look at how the platform makes money.

content"}”>How does Instagram make money?

content"}”>Instagram – as part of Facebook products – makes money via advertising revenues. We can’t know for sure exactly how much Instagram makes as Facebook doesn’ break down for us its revenues. However, a good chunk of Facebook revenues seems to be driven by Instagram.

Breaking down Instagram revenue model

Instagram has a set of features that allow users and businesses to monetize their presence on the platform.

Stories

In 2016, Instagram introduced its “stories.” This is a short-video generated by the users, which disappears after 24 hours from its publication. Instagram introduced that format to emulate Snapchat.

It is possible for advertisers to create campaigns within those stories, and invite users to take action, to generate conversion for their brands.

Other Ad formats

Brands can also monetize their presence on the platform via photos, videos, collections, and carousels. Indeed through the Facebook Ads Manager, it is possible to launch paid photo campaigns on Instagram.

Those businesses can perform ads based on:

  • Location
  • Demographics
  • Interests
  • Behaviors
  • Custom Audiences
  • Lookalike Audiences
  • Automated targeting

The metrics that advertisers can look at when promoting their brands follow into three categories:

  • Awareness: which takes into account reach and frequency
  • Consideration: it takes into account website clicks, the reach and frequency, and video views
  • Conversion: it takes into account website conversions, dynamic ads, mobile app installs, and mobile app engagements

Key takeaway

  • Instagram got started in 2010 to solve three primary issues: make photos beautiful by adding filters, making it easy to integrate and share them across several platforms and to offering a smooth experience in uploading and sharing those visual experiences
  • The company grew quickly, at the point of being acquired by Facebook in 2012, for a billion dollar
  • Facebook kept it independent and allowed it to develop as a separate unit within its business model until 2018
  • In 2018, Instagram founders left the company as Facebook Inc. tightened up its grip and integration on Instagram
  • According to some analysts, Instagram will generate most of Facebook Inc. revenues in the future
  • Instagram is a user-generated platform, that leverages on algorithms to scale this process and it monetizes its platform via visual advertising that happens through a few features (like stories, pictures, videos, carousels, and collections)
  • The core platform to advertise on Instagram is the Facebook Ads Manager, which makes it possible for businesses to zoom in their audiences to offer targeted ads to improve awareness, consideration and generate conversion
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Published by

Gennaro Cuofano

Gennaro is the creator of FourWeekMBA which he brought to reach about a million business students, professionals, and entrepreneurs in 2019 alone | Gennaro is also Head of Business Development for a high-tech startup, which he helped grow at double-digit rate and become profitable | Gennaro is an International MBA with emphasis on Corporate Finance | Subscribe to the FourWeekMBA Newsletter | Or Get in touch with Gennaro here

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