Instagram Checkout will be the world’s most powerful digital shopping experience. It will beautifully bridge the gap between content and commerce while giving us a convenient tool, which we love. Instagram is now starting to expand these features to brands and retailers.
Although I hate to be a wet blanket, I have bad news. In this new world, Instagram will own the user relationship . The platform will partner with leading brands and retailers to sell products on it’s platform. When a user purchases, the order will be sent to the brand (or 3rd party logistics). The user info and email will stay snuggly in Instagram’s digital-hand. Brands and retailers will be at the mercy of the media behemoth. They will need to pay-to-play, trading their advertising dollars every month to stay in the black.
Slow and Steady Wins the Race
In 2017, Instagram shot the first bullet — allowing brands to tag their products within the app. The user would then be navigated to the brand’s website for purchase. A great feature to drive targeted traffic and show the power of content & commerce.
In early 2019 Instagram brought out the big guns — allowing select US brands to add an in-app purchase button. This allows users to buy the product directly without leaving the app. The payment would be handled by Instagram and the sale will be transferred to the brand for fulfilment. This is a game-changer which we will only fully understand in 5 years.
Although data is rare — Adidas, one of the brands in the pilot, has published that their online sales have increased 40% YoY for the first quarter of 2019. In their words, the increase in sales was “largely due to Instagram” and their participation in the closed beta.
Expansion of Checkout due to COVID-19
During the second part of 2020, Instagram pushed the Instagram Checkout and Shop features with more urgency. It is now expanding the Checkout program to other US businesses. This appears to be part of their strategy to boost their e-commerce offering due to COVID-19’s new world order. From many published statistics, we know e-commerce has been booming and gobbling up more market share from classical retail. Makes sense Instagram wants in on the game.
How Instagram Checkout will change the game
Today — the classical e-commerce supply chain hasn’t changed much in the past 20 years. Brands focus on producing products. Retailers distribute the products to the end-users using economies of scale advantages such as large product variety and fast shipping.
Future— with the rollout of Checkout and Shop, brands & retailers are offered a new sales channel to reach users. But what happens when this channel is suddenly 30% of their entire sales? Or perhaps even 50%. Instagram will own the user relationship. That means brands and retailers will need to stay in the networks good graces to keep the sales coming in. What will happen when when Zuck decides to change his algorithms or increase marketing costs? The partners will be forced to pay the premium price, or risk going belly up.
Isn’t increasing sales a good thing?
To demonstrate the effects Instagram will have, lets examine the sales channels of a classic brand such as Nike. As you can see below, the majority of the revenue in 2015-2020 comes from two main sales channels, it’s wholesale business (selling to other stores) and direct (stores and website). It’s goal is to shift as much revenue as possible to channels controlled directly and not rely on third party wholesalers who can terminate the partnership anytime they wish.
Source: Nike Annual reports
Fast forward five years. Instagram Checkout are mainstream for several years already. How does the Nike sales channel distribution look like?
E-commerce will slowly but surely overtake offline retail with Instagram leading the digital e-commerce growth. Nike will work with Instagram to leverage the new shift mostly with younger users. Their bottom-line would grow steadily like today, with the only change being sales through Instagram will cannibalise existing direct and wholesale channels.
Source: Nike annual reports and estimates
Between 30% and 40% of Nike sales will originate from Instagram. That is a double-edged sword. Nike will be completely dependant on Instagram for a large part of their business. Instagram can, and will, increase their prices in order to maximize shareholder value. Nike will compete head-to-head with their competitors over ad placements.
“You’re being paranoid, it won’t get that far!”
Won’t it? Similar skeptics said the same about the early days of Facebook. Publishers were all too happy to use the social network to drive traffic. What happened there? Slowly but surely, publishers got hooked to this traffic. Facebook started decreasing the organic reach and publishers needed to pay to keep up traffic levels. And today? Facebook is 40% of all referral traffic.
Who are the winners and losers?
- Instagram – owns the platform, the user relationship and distribution. It has no direct competition and can charge whatever it wants. Clear dominant position = winner
- Brands – they own the products, but lack the user relationship. They are dependant on stable sales channels. A large channel will be Instagram, which is not stable = loser
- Retailers – they don’t own products or user relationship. Their value comes from facilitating, which Instagram is replacing them by becoming the go-to between = big loser
How can brands defend themselves?
I’ll be honest — it’s a difficult position to be in.
On the one hand, Instagram has over 1 billion active users. These users are addicted and visit the app multiple times a day. Furthermore, a large part of content viewed on Instagram feature lifestyle products such as fashion, shoes and furniture. The path from discovery to purchase is small and reachable. The easiest way for lifestyle brands to tap into this audience is by joining Instagram Shop. In the short term they will likely see increased sales.
On the other hand, working with Instagram will lead brands down a slippery slope which ends in a dark pit. Every year that passes, sales from Instagram will increase and with that their dependancy on the platform increases. The pit gets deeper and darker. Over time, Instagram will increase ad prices to squeeze brand margins. One day the ad spend brands pay Instagram will be the #1 budget line within marketing expenses. The brand will have no alternative. Check and mate.
- 2020-08 / Expanding Instagram Shop to eligible US businesses [Instagram]
- 2020-07 / Introducing: Instagram Shop, starting to test with select partners [Instagram]
- 2020-05 / Introducing Shops on Instagram [Instagram]
- 2019-09 / Allowing brands to publish Shopping Ads [Instagram]
- 2019-03 / New to Instagram Shopping: Checkout [Instagram]
- 2019-04 / New: Shop Looks From Creators [Instagram]
- 2018-05 / Instagram quietly launches payments for commerce [TechCrunch]
- 2018-03 / After launching in the U.S., Instagram expands its shoppable posts features to business users in eight other countries [TechCrunch]
- 2016-11 / Instagram tests shoppable photo tags [TechCrunch]