Instagram - the business model

Instagram, well we all know Instagram. It is an app that allows you to share photos and videos and is one of the most popular social media sites now. Ya, we all know that but do we really know it as well as we think we do? Haven’t you been curious as to what really goes on behind the scene of maintaining a social media platform? With 800 million users worldwide, how is it that they are able to provide the app for free yet earn revenue? So what business models did they followed?

Hodis et al. segmentation framework

An article titled, “Interact with me on my terms: a four segment Facebook engagement framework for marketers”, published by Hodis and colleagues in 2015, talks about the matrix that they have used to segment Facebook users. The consumers were segmented into 4 categories based on their level of creation and consumption. Even though this matrix was used to segment and understand the consumers of Facebook, this same matrix can be applied to other social media platforms such as Instagram as well.

In most social media platforms and even in Instagram, there are bound to be people that are very active in publishing and reading other people’s content which are known as the devotees while there are some that just create an account to read what others have posted and not really post anything themselves which we refer to as the connection seekers and so on. This segmentation helps marketers to understand that every user of Instagram or any other social media platform is different and therefore, they should come up with different approaches and marketing strategy to effectively reach out to them.

Advertising is their revenue

Instagram actively uses the advertising model to earn revenue by allowing advertisers to pay for their ads to be featured on the user’s timeline, in various forms such as photo, video or even on their Instagram stories. Instagram then uses algorithms to personalised ads that will be shown on the user’s timeline based on their interest, search history and comments. An example is once when I was researching about Contiki Tours on my Instagram account and I realise for the next few days, a lot of sponsored ads related to Contiki Tours keep on appearing on my timeline. Therefore, this shows that Instagram really does personalised ads for you.

Although Facebook never released the amount of revenue Instagram earned from advertising but it is still one of the more preferred advertising platforms and based on the digital report released by We Are Social, Instagram ranks number 2 in the number of social media advertising audiences with 895 million just right after Facebook with 2,121 million advertising audiences.

This is because Instagram allows for better brand engagement as compared to other social media platforms such as Facebook and Twitter. According to Forrester, Instagram has an engagement rate of 4.21% while Facebook and Twitter only have a combined engagement rate of 0.10%. This is important for businesses who want to build long-term relationships with their customers. Also, Instagram allows businesses to advertise to a more specific target audience based on their demographics, interests, behaviours and understand where their target audience are located.

Hence, these reasons showed that even though Instagram have a lesser number of social media advertising audiences, a lot of marketers and businesses are still willing to spend money on creating ads on Instagram as they knew that by doing this, it will help businesses to reach their target audience more effectively and get more promotion and return of investment.

Wrapping things up

Instagram has been successful in understanding what are the advertisers needs when it comes to advertising to their target audience and how they can earn revenue from that. Therefore, if this continues to keep up, it might one day be able to surpass Facebook as the most used advertising social media platform.