How Does Instagram Make Money? Business Model Explained!

A few Wall Streeters were baffled when Facebook (now Meta) acquired the photo-sharing app Instagram for around $1 billion in cash and stock in April 2012. Instagram had less than two years old, 13 employees, and no revenue at the time.

According to a Feb. 2020 Bloomberg report, Instagram generated $20 billion in advertising revenue in 2019. The majority of American marketers plan to spend the majority of their influencer budgets on Instagram in 2020.

By 2018, Instagram was valued at $100 billion, according to Bloomberg Intelligence. Instagram had just announced a few days earlier that they had reached 1 billion active daily users.

Facebook made a profit on a cash cow at a cheap price.

What is Instagram?

Instagram is a free photo and video sharing app available on iPhone and Android. You can upload photos or videos to our service and share them with your followers or a select group of friends. They can also view, comment and like posts shared by their friends on Instagram. Anyone 13 and older can create an account by registering an email address and selecting a username.

In 2019, there were almost 815 million users who accessed the photo-sharing platform Instagram on a monthly basis. In 2023, this figure is projected to reach nearly 1.2 billion users, as the most recent forecast suggests.

How Does Instagram Make Money?

1. Advertising

Instagram’s primary source of income is advertising revenue. In fact, over 98% of Facebook’s revenue in 2019 came from advertising. During the full year, it received $69.7 billion in advertising fees, a large portion of which came from Instagram. Analyst research indicates that Instagram is growing faster than its parent company, regardless of whether separate figures are reported.

The Merkle Digital Marketing Report found that advertising spending on Instagram increased 177% over the past year, while spending on Facebook grew only 40%.

The following features make Instagram attractive to advertisers:

  • The show attracts a young audience. The majority of teens say Instagram is their favorite app, with about 85% using it.
  • Users click on links on the site. A commercial link was clicked by 130 million users for more information about a product.
  • Advertising is actually wanted by its users. Approximately 90% of shopping enthusiasts follow a business, and 50% are more likely to become interested in a brand after seeing an advertisement.

In addition, Instagram impressions were up 209% year-over-year in the same quarter, while Facebook’s were down 17%.

Users of a site are recorded as having viewed an advertisement when they view a page with the advertisement. In the Internet marketing world, ad impressions are good, but ad clicks are better. A click on an advertisement is a positive user response directing them to the advertised product’s site.

Ad impressions are seen as a leading indicator of ad hits. The more people see the ad, the more hits it is likely to achieve.

2. Instagram Shopping

Shoppable posts were introduced to Instagram at the end of 2016, allowing brands to tag products in posts like friends do. Having shoppable posts reduced the friction in the buying process by helping users discover and consider the purchase cycle. The brand’s website was redirected to shoppers to make the purchase. This reduced friction and increased conversions would be exchanged for a commission from Instagram, like an affiliate program. 

Shoppable posts were further enhanced in March 2019 with the ability to check out within the Instagram app itself, further reducing friction in the buying process. Sellers on Instagram pay a fee to use the Shoppable posts feature.

3. Creators Tools

Users are engaged and grow when they are interacting with content created by creators. In the case of apps that rely on user-generated content, paying users to create content may encourage them to create more and produce more consistently.

Moreover, with competitors such as YouTube & Twitch paying content creators, non-paying platforms have become less lucrative.

In this way, Instagram has been focusing on creators to help them make money from Instagram and establish a direct relationship with their fans. According to the Verge, Instagram will pay advertisers for ads shown on Reels if it earns a 55% cut of revenue from ads shown on IGTV. 

In addition to ad revenue share, Instagram creators can also earn money through badges, which allow fans to show their support during live videos.

The heart icon appears next to the name of users who purchase badges during a live video. Users whose badges have been purchased will be able to ask questions during the live session. Instagram does not deduct any commission from creators’ earnings from badge sales. 

What’s Driving Instagram’s Ad Revenue Growth?

Instagram thrives mainly due to its devoted and growing mobile user base, which surpassed one billion in June of 2018, at a time when Facebook’s mobile phone presence was radically lower.

Since that time, mobile has been a growing segment of Facebook’s advertising, accounting for 89% of its ad revenues in 2017 versus 84% in 2016.

When Facebook bought the app, Instagram was strictly about image-sharing. Within a year, video capabilities were added.

Advertising on Instagram is becoming increasingly sophisticated. One feature lets advertisers display slideshows and link to sites outside Instagram. Its carousel ads facilitate multi-page print campaigns on mobile phones.

That type of brand advertising has thus far eluded some of Facebook’s biggest web competitors, allowing Instagram to win a significant part of the market.

Like many big names in social media, Instagram started out as a fun idea without a clear path to profit. For Instagram and Facebook, advertising has become the monetization model.

Because it is fundamentally a visual app, Instagram is a natural platform for branded advertising. And as computing moves away from the desktop, especially among millennial users, Instagram is well-positioned to be the dominant platform for advertising in the 21st century.

Learn more about how Pinterest makes money.

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