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Facebook's Plan to Monetize Social Commerce

Adam Levy, The Motley Fool

Facebook (NASDAQ: FB) has rolled out several new commerce features over the past few years. Everything from its Craigslist-like Marketplace to Instagram Checkout is making it easier to buy stuff on Facebook's apps without ever having to go to another website. CEO Mark Zuckerberg has even laid out plans to integrate the company's messaging services to make selling items on its platform easier.

With Facebook's advertising sales growth starting to slow, it's worth asking how e-commerce might play into Facebook's future monetization plans. Indeed, analysts asked management how it plans to monetize features like Facebook Marketplace or Instagram Checkout during the company's first-quarter earnings call.

The short answer: Facebook won't monetize e-commerce on its platform at all if it doesn't have to.

Zuckerberg says he wants to provide "as many of these things at cost and for free as possible." He sees the services ultimately providing greater value to the advertising business.

Three screenshots of the checkout process through Instagram Checkout

Image source: Instagram.

All about conversions

Advertising and e-commerce go hand in hand. In fact, Zuckerberg argues, "It's really a continuous spectrum, and they're not two different things." Facebook's e-commerce tools are just used further down in the sales funnel than its ad products.

"We're going to build more tools for people to buy things directly through the platform," Zuckerberg told analysts. "As those products that we build help businesses convert better, it will be more valuable to them and therefore that will translate into higher bids for the advertising."

Tools like Instagram Checkout or a fully integrated private messaging service will help online retailers sell more effectively and more efficiently. If a user just has to push a button to buy something on Instagram -- no need to enter shipping or billing information -- merchants are likely going to make a lot more sales. Facebook can provide ad products that drive users to its new e-commerce features, which ought to show better return on investment than its ads that drive traffic to a merchant's website, for example.

Moreover, overseeing the entire sales process from first impression through checkout gives Facebook superior measurement data. It's one of the biggest advantages Amazon (NASDAQ: AMZN) has over competitors, and why it's seen as such a threat to established digital advertising companies like Facebook. Facebook can fight back by controlling the shopping data within its ecosystem if it builds out the necessary tools for merchants.

What's next?

Facebook is developing ad products that support its commerce tools. Facebook is still expanding Marketplace ads globally, and it only just launched Instagram Checkout with 23 merchants in a closed beta.

Facebook is also working to expand payments within its messaging apps and integrate all of its messaging apps for cross-platform communication. That could open the opportunity for new ad products that push potential customers to their preferred messaging app to contact a merchant and complete a purchase. It would also enable businesses to operate more efficiently by establishing a single platform they use for communicating across Facebook's apps, further boosting their returns by cutting out overhead expenses.

There are still a lot of ways for Facebook to improve its commerce functionality and drive better results for businesses. But Zuckerberg did give himself an out. "If payments becomes a really important part of what we do ... we'll have some options and choices about how we choose to have the revenue flow to us in the future," he said.

Overall, the game plan with Facebook's commerce tools is the same as it's been for every other Facebook service for businesses. Just because the social media company is now facilitating the movement of money from one party to another doesn't mean it has to take some off the top in order to benefit. Management stressed it's still very early on e-commerce, but investors should pay attention to how Facebook integrates the shopping features it's working on with its advertising products.

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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Amazon and Facebook. The Motley Fool owns shares of and recommends Amazon and Facebook. The Motley Fool has a disclosure policy.