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How a new Instagram feature could boost Facebook's bottom line

Daniel Howley
Technology Editor

Facebook (FB) is set to announce its Q1 2019 earnings on Wednesday, and analysts are especially interested in how Instagram's new in-app Checkout feature is panning out.

Announced by Facebook in March, Checkout lets users buy items from a specific set of brands from within Instagram without ever having to leave the app. The benefits of the feature are two-fold. First off, it keeps users inside Facebook's ecosystem longer, and second, it gives the social networking giant the ability to provide advertisers with a true measure of their return on investment — which could in turn speed up ad sales.

"To be clear, we are bullish [on] Instagram’s commerce opportunity...as we see large and small brands/retailers leveraging Instagram’s leading reach, data, and 'browsing/aspirational' behavior to grow their online businesses...and for Instagram to monetize these transactions," Morgan Stanley analyst Brian Nowak wrote in a research note.

In other words, Instagram's Checkout feature is going to be a major focus for investors during Facebook's earnings and over the next year.

Buying directly through Instagram

Instagram's Checkout feature is still in its early stages — in fact, Facebook is calling this a beta test for the time being with just 23 brands participating. They include Adidas, Burberry, Dior, H&M, Kylie Cosmetics, Nike (NKE), Prada, Uniqlo, Warby Parker, and Zara, to name a few. Notice how each of those brands is a natural fit for advertising via images and photos. We're talking about bright colors and sleek makeup — not printer paper.

The brands that Facebook is working with are the kind that people regularly post about or like on Instagram. The aspirational branding associated with Instagram and so-called "influencers" makes Instagram the perfect sales platform. There's a reason Kylie Jenner, who is among the most followed celebrities on Instagram, is participating in the beta via her Kylie Cosmetics line.

Users have been able to browse products on Instagram for a while now. You could easily tap the discover tab and scroll through items that align with your interests with ease. But the friction point came when it was time to make a purchase. Since Instagram didn't offer an in-app checkout feature, users had to be directed from the app to a brand's shopping site, where the user would finish their transaction.

Instagram's Checkout feature will let you purchase items directly through the social media app. (Image: Instagram)

That alone made it more difficult for users, which made them less likely to make a purchase. The more time they have to think, the less inclined they are to spend.

With Checkout, Instagram lets you purchase items directly within the app by entering all of your shipping and credit card information. If sales through Instagram are brisk enough, advertisers will take notice and begin to purchase more ads through the social network.

"Instagram’s position here is strong and opportunity large, as its budding social commerce tools are aimed at leading retailers, small and medium-sized businesses (SMBs), as well as brands," Nowak wrote in his note.

Checkout is still in beta, but if Facebook announces any encouraging information about the feature during the company's earnings call, it could be a sign that Instagram is on its way to being more than a simple photo sharing site.

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Email Daniel Howley at dhowley@oath.com; follow him on Twitter at@DanielHowley. Follow Yahoo Finance on Facebook, Twitter, Instagram, andLinkedIn.finance.yahoo.com/