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Instagram Takes the Next Step to Conquer "Social Shopping"

Adam Levy, The Motley Fool

Instagram is practically a digital shopping mall of endless window displays. Over the past few years, parent company Facebook (NASDAQ: FB) has made it easier for users to find out who sells the items they see, with product tags to identify them and product pages for more details.

Now, users can buy some of those items within Instagram; there's no need to navigate away to a retailer's website. Instagram has partnered with select retailers to enable users to check out directly within Instagram. The reduced "friction" should increase sales and Instagram will take a small cut of each sale.

Instagram previously considered building a stand-alone shopping app, and this product could be the precursor to a more robust shopping experience.

Screenshots of the Checkout process on Instagram for someone buying makeup.

Image source: Instagram.

Insta-shopping

The interest in shopping on Instagram is growing rapidly. Over 130 million users check product tags in posts, Ashley Yuki, the Instagram product exec in charge of shopping, told Recode. That's up from 90 million in September.

Instagram rolled out an updated Explore tab last summer that included categories of curated content at the top that the site selected for you. The company included Style and Shopping categories that show shoppable posts where users can click a picture to show product tags. That move dramatically improved users' ability to discover shoppable content on Instagram, and the growth in users actively engaging with product tags indicates the interest is there.

Successfully launching Checkout, as Instagram is calling its in-app purchase system, will require Instagram to get posts that include Checkout content in front of its users. The Explore tab could play a pivotal role in that endeavor.

It's worth noting Instagram isn't the only social media company with its eyes set on shopping. Snap started experimenting with a "visual search" feature last fall that enables users to point their camera at an item in the real world and learn more about the product on Amazon. Snap's hoping its camera technology has superior product recognition capabilities compared to similar applications. Snap management hasn't provided any updates on engagement with the product.

Pinterest also offers businesses the ability to include product descriptions and pricing in the app, but directs users to the retailer's website to complete transactions.

What shopping on Instagram could mean for investors

There are a couple of key ways Facebook can grow Instagram's revenue via this new shopping product.

First, Instagram keeps a small percentage of each purchase made through its app. Growing the number of retail partners and engagement will naturally lead to more sales and more revenue for Instagram. However, it's not likely to be a needle-mover for Facebook, which generated $55.8 billion in revenue last year. In 2017, "social shopping" accounted for $6.5 billion in sales among the top 500 retailers, according to Business Insider, and Instagram would be only a small part of that.

The bigger opportunity is in advertising. If the Checkout feature can show improved conversion rates over navigating to retailers' websites, it could be a valuable advertising product for marketers. Facebook CFO Dave Wehner told investors the Instagram feed had reached ad load saturation as of the end of 2018. Offering an ad product with higher conversion rates should result in higher ad prices for Instagram. Shoppable ads could also be valuable in Instagram's Stories format.

The latter opportunity is still further down the road. Instagram is testing the product with just a couple dozen retailers at launch. As Instagram gains more retail partners and more data on how Checkout impacts sales, it can integrate the feature into its ad products, which should help bolster revenue growth going into next year as the company laps the quarter it reached ad load saturation.

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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. The Motley Fool owns shares of and recommends Amazon and Facebook. The Motley Fool has a disclosure policy.