instagram-business-model

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

Instagram makes money via visual advertising. Acquired by Facebook for a billion-dollar in 2012, today, Instagram is integrated into the overall Facebook (now rebranded as Meta) business strategy. In 2018, Instagram founders Kevin Systrom and Mike Krieger left the company as Facebook pushed toward tighter integration of the two platforms. In 2022, Instagram is the most successful product still, in Meta’s portfolio. 

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 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 became 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 – who would also become Instagram co-founder – was a power user of Burbn, 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 in an Interview for the Tim Ferriss 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 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 had a walk with his wife.

He asked her why she thought the app wasn’t exciting on the walk. 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 they returned to their room, Systrom added the first Burbn filter:  X-Pro II. 

A big hairy audacious goal

big-hairy-audacious-goal-bhag
The notion of a big hairy audacious goal was first introduced by Jim Collins and Jerry Porras in their book Built to Last: Successful Habits of Visionary Companies. A big hairy audacious goal (BHAG) is a clear and compelling long-term goal guided by a company’s values and purpose.

As Kevin Systrome, founder of Instagram, pointed out in one of their 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

product-market-fit
Marc Andreessen defined Product/market fit as “being in a good market with a product that can satisfy that market.” According to Andreessen, that is a moment when a product or service has its place in the market, thus enabling traction for the company offering that product or service.

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 with other social media platforms.

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. 

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 gradually integrating its advertising network within Instagram.

Indeed, only in 2015 would ads be widely available on Instagram.

For an organization, it is critical to develop a sustainable revenue model that can be integrated into its overall business model.

And Facebook successfully completed this transition between 2015-2016.

Facebook goes all in with Instagram

facebook-statistics
A FourWeekMBA Analysis shows that in 2021, the growth of Facebook’s revenues was driven by the US & Canadian users’ monetization due to a 24% price per ad increase 2021.

The integration between Facebook and Instagram proved so successful that by 2021, Facebook, which makes most of its money from advertising revenues, also transitioned successfully to mobile.

Which, as of 2021, represented over 97% of Facebook advertising revenues!

We don’t know exactly how much of those revenues were coming from Instagram, but we can easily assume that most than half of Meta’s advertising revenues come from Instagram. 

Instagram and Facebook are still among the largest digital advertising platforms on earth. 

advertising-industry
The hidden revenue generation model is among the most profitable patterns for business models built on advertising. Businesses like Google and Facebook have managed to gain more than $290 billion in 2021 from advertising on their platform, even though many users might not be aware of the mechanisms that drive those platforms.

Zuckerberg takes over

Fast forward to 2018, as Systrome pointed out in 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 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.

Therefore, we have three primary payoffs for each of its key partners:

  • Users: build relationships through visual storytelling
  • Businesses: advertising their brands and products
  • There is also a third persona that is a key partner for the Instagram business model: 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 do influencers matter so much to Instagram’s overall business strategy?

Instagram is among those digital platforms which master and automate 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 long-term success for platforms like Instagram, Pinterest, Facebook, Quora, Twitter, and many others.

However, 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.

Understanding the relationship between the digital platform (Instagram) and the influencer is important.

While influencers with a monetizable following make money with their content by selling sponsored posts and campaigns on their profiles, Instagram could not capture that value directly.

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.

How does Instagram make money?

As part of Meta’s products, Instagram makes money via advertising revenues.

We can’t know for sure exactly how much Instagram makes, as Meta does’ break down for us its revenues.

However, a good chunk of Meta revenues seems to be driven by Instagram.

Breaking down the Instagram revenue model

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

Reels

In an attempt to fight the quick rise of TikTok, Instagram integrated another short-form video content within its platform: Reels. 

Introduced in August 2020, Instagram explained

Reels invites you to create fun videos to share with your friends or anyone on Instagram. Record and edit 15-second multi-clip videos with audio, effects, and new creative tools. You can share reels with your followers on Feed, and, if you have a public account, make them available to the wider Instagram community through a new space in Explore. Reels in Explore offers anyone the chance to become a creator on Instagram and reach new audiences on a global stage.

Reels have become the new standard for social platforms, like Instagram, as the rise of TikTok has made short-form video formats into the rule-of-thumb type of content. 

tiktok-business-model
TikTok is the Chinese creative social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, and it generated $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.

Stories

In 2016, Instagram introduced its “stories.”

This short video is generated by the users, disappearing after 24 hours after its publication.

Instagram introduced that format to emulate Snapchat.

snapchat-business-model
Snapchat is a camera company, which business model moves across three industries: social media, content marketing, and AR. Snapchat generates most of its revenue from several ad formats (AR Ads, Snap Ads, Sponsored Geolifters, and Sponsored Lenses). The company also produces Spectacles, a set of AR glasses enabling content creators to produce interactive experiences through 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 the following:

  • 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 offering a smooth. experience in uploading and sharing those visual experiences
  • The company grew quickly, to 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 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 on their audiences to offer targeted ads to improve awareness, and consideration and generate conversion.

Read next: Facebook Business Model, TikTok Business Model, YouTube Business Model.

Related Business Models

Mark Zuckerberg Empire

who-owns-facebook
Mark Zuckerberg is the principal shareholder of the company. Not only he retains ownership and control of the company. Facebook, like Google, has issued two kinds of common stocks, Class A and Class B. Where the holders of Class B common stocks are entitled to ten votes per share, and holders of our Class A common stocks are entitled to one vote per share. Mark Zuckerberg has a total voting power of 57.9%. 

Attention-Merchants Business Model

attention-business-models-compared
In an asymmetric business model, the organization doesn’t monetize the user directly. Still, it leverages the data users provide and technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data and its algorithms sold to advertisers for visibility. This is how attention merchants make monetize their business models.

Asymmetric Business Model

asymmetric-business-models
In an asymmetric business model, the organization doesn’t monetize the user directly. Still, it leverages the data users provide and technology, thus having a key customer pay to sustain the core asset. For example, Google makes money by leveraging users’ data and its algorithms sold to advertisers for visibility.

Facebook Business Model

facebook-business-model
Facebook, the main product of Meta, is an attention merchant. As such, its algorithms condense the attention of over 2.91 billion monthly active users as of June 2021. Meta generated $117.9 billion in revenues, in 2021, of which $114.9 billion was from advertising (97.4% of the total revenues) and over $2.2 billion from Reality Labs (the augmented and virtual reality products arm). 

Facebook ARPU

facebook-arpu
The ARPU, or average revenue per user, is a key metric to track the success of Facebook – now Meta – family of products. For instance, by the end of 2021, Meta’s ARPU worldwide was $11.57. While in US & Canada, it was $60.57, in Europe, it was $19.68, in Asia $4.89, and in the rest of the world, it was $3.43.

Facebook Organizational Structure

facebook-organizational-structure
Facebook is characterized by a multi-faceted matrix organizational structure. The company utilizes a flat organizational structure in combination with corporate function-based teams and product-based or geographic divisions. The flat organizational structure is organized around the leadership of Mark Zuckerberg and the key executives around him. On the other hand, the function-based teams are based on the main corporate functions (like HR, product management, investor relations, and so on).

Metaverse Supply Chain

facebook-metaverse

Google Business Model

hidden-revenue-model-google
A hidden revenue business model is a pattern for revenue generation that keeps users out of the equation, so they don’t pay for the service or product offered. For instance, Google’s users don’t pay for the search engine. Instead, the revenue streams come from advertising money spent by businesses bidding on keywords.

TikTok Business Model

tiktok-business-model
TikTok is a Chinese creative social media platform driven by short-form video content enabling users to interact and generate content at scale. TikTok primarily makes money through advertising, and it generated $4.6 billion in advertising revenues in 2021, thus making it among the most popular attention-based business models or attention merchants.

Instagram Business Model

instagram-business-model
Instagram makes money via visual advertising. As part of Facebook products, the company generates revenues for Facebook Inc.’s overall business model. Acquired by Facebook for a billion dollars 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.

YouTube Business Model

how-does-youtube-make-money
YouTube was acquired for almost $1.7 billion in 2006 by Google. It makes money through advertising and subscription revenues. YouTube advertising network is part of Google Ads, and it generated more than $28B in revenue by 2021. YouTube also makes money with its paid memberships and premium content.

Twitter Business Model

how-does-twitter-make-money
Twitter makes money in two ways: advertising and data licensing. In 2021, Twitter generated $4.5 billion from advertising and $570 million from data licensing. While Twitter generated $5 billion in total revenues, it lost 221 million.

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