Instagram
May Begin Making Profit
Leah Vetro
With picture-sharing app Instagram
gaining more users every day, the creators of the popular nonprofit app are
beginning to think of ways to make money off of it. Instagram was created by
Kevin Systrom in 2010, and was bought by Facebook in 2012. Since Facebook
bought the app, Instagram gained 128 million users by September of 2013 and is
now valued at $1 billion. How is it that the app is worth so much, yet hasn’t
made any profit?
The spike in popularity shown in the
graph above gives creators hope that they can begin to make marginal profit off of their successful
app. Instagram is valued so highly because Facebook initially offered $1
billion to buy the app, but they have yet to make profit off of it. Consumers willingly download the app
because, for one, it is free, and secondly they have the positive externality of enjoying what Instagram claims to do, “to capture and share the world's moments.” While Instagram users
continue to benefit from the app, those who produced it bear the negative externality of making no revenue.
What is stopping Instagram from making millions of dollars? It’d
be easy enough to make the app cost a buck to install, however; this cost could
cost them their popularity and drive away their targeted market of teenagers. The purpose of making the free app
also free of ads for the first few years is to increase the popularity and
number of users. Just like how free samples are handed out to draw people in,
the intent of the free app is to attract people to the product and get them
hooked. The danger in adding a cost to the product is that although Instagram
would make profitable gain, the negative
externality of the added cost for users could cause them to turn to free substitutes.
Big changes are in the future for Instagram. Do not worry—there
are no plans to actually add a cost to download the app, however; director of
business and operations Emily White faces the challenge of “how to integrate
marketing without jeopardizing Instagram's cool factor.” She fears that
advertisements will clutter the environment. When Instagram tried to change the
terms of service, the unclear information about advertisers having access to
the photos angered costumers and caused the daily number of users to drop by 4
million. Despite the consumers’ backlash, White does believe ads will be a part
of Instagram in the near future as long as it is done right. Instagram could
also make a profit from charging low subscription fees. They would see plenty
of revenue, and customers who are hooked would most likely be willing to pay
the extra buck to keep the app.
No matter what the approach, creators of the app have plenty of
options to begin to make profit. What is left to decide is how they will find a
way to ensure the marginal costs do not outweigh the marginal benefits. If the
cost of customer satisfaction is of less importance than the expected millions
of dollars in revenue, it is up for the creators to decide—will it be worth the
risk?
Works Cited
"How Instagram Can Make
Money — Without Alienating Users." Knowledge@Wharton. Wharton
School of the University of Pennsylvania, 2 Jan. 2013. Web. 23 Mar. 2014.
<http://knowledge.wharton.upenn.edu/article/how-instagram-can-make-money-without-alienating-users/>.
Luckerson, Victor. "These 8
Internet Companies Are Worth Over 1 Billion But They Havent Made a Dime." Time.
Time Inc., 29 Oct. 2013. Web. 23 Mar. 2014.
<http://business.time.com/2013/10/29/these-8-internet-companies-are-worth-over-1-billion-but-they-havent-made-a-dime/>.
Rusli, Evelyn M.. "Instagram
Pictures Itself Making Money." The Wall Street Journal. Dow Jones
& Company, 8 Sept. 2013. Web. 23 Mar. 2014.
<http://online.wsj.com/news/articles/SB10001424127887324577304579059230069305894>.
Spencer, Graham. "A Look Back
At Instagram’s Growth As It Hits 100 Million Monthly Active Users." MacStories.
N.p., 26 Feb. 2013. Web. 23 Mar. 2014.
<http://www.macstories.net/news/a-look-back-at-instagrams-growth-as-it-hits-100-million-monthly-active-users/>.
Facebook was created six years earlier in 2004, but it has expanded exponentially in the past seven years. Given that Instagram was only launched in 2010, there is still plenty of room for growth--but will making a profit off Instagram deter their popularity? The producers could model advertisements based on Facebook's methods since it seems to be working for them. Also, how many substitutes are really available for users reluctant to pay? The likelihood of people immediately abandoning Instagram over a few price raises is small; however, in the long run it may see fewer accounts due to the cost, making it a relatively inelastic good.
ReplyDeleteAlthough Instagram is projected to increase in number of users as did Facebook ten years ago, one factor that could hinder its incline is a decrease in demand for its services. One of the factors of demand is consumer tastes, and although consumers have taken a liking to Instagram thus far, when a new and creative app comes out on the market, they may turn away from Instagram, causing a decrease in demand. This decrease in demand would cause the demand curve to shift to the left, making it even more difficult for the executives of the Instagram company to charge money for the app since people would not be willing to pay high prices. In order to compete with other, new and free apps on the market, Instagram will have to use nonprice competition by reeling in consumers with its image rather than a price change. Really interesting idea, Leah!
ReplyDeleteIt is interesting to look into how changing one simple thing, the cost, can cause a major decrease in quantity demanded. Because the target consumers are teenagers, who are probably less likely to want to pay for the app, it is important for Instagram to look into their target market. Rather than adding a price to the app, they could add advertisements to the free app and then make an app that is add free if people are willing to pay for it. While some people are willing to deal with the ads, may people are willing to pay just to get rid of them. However, a trade off to this choice is that people might boycott Instagram all together if they could find a new app that is free of cost and adds. In this cast Instagram must look at the competition and make the best choice based on what other competitors are providing.
ReplyDeleteWith the popularity that has grown with Instagram, it would be smart to make some sort of a profit off of it. I think that people who already have the app will be willing to pay a small fee, however, people in the future looking to download Instagram will not be so willing because although the price would be small, for the general population of people downloading it (teens) it is excessive. Those people who are willing to deal with ads, it will not affect them too much but it will be a turn off for people in the future possibly. Overall, I think that Instagram wouldn't lose too much popularity if they incorporate ads or a price to the app in the long run. In the near future, they might have some issue keeping numbers up but that will wear off once people get used to the idea.
ReplyDeleteThough Agreed with White, that adding advertisements to instagram may cause to much clutter, there are other ways to make profit. For example, if they create new filters for the app and charge 50 cents for every new filter. That way you still have all of the old filters and the app is still free. There would be no advertisements and the site would be just as popular. I think marginal benefit would also go up as well, because there are those people who buy their instagram followers they would also buy the extra filters, making a cheap price then everyone would buy them as well. The benefit is having that cool filter that some people may not of paid for. Though that may look stupid for some people, the affect would be beneficial for making a profit off this app in the long run.
ReplyDeleteAs a user of instagram my self, I never paid attention to the lack of ads on the app. I assumed it made money being a very popular social media tool. Now hearing that it doesn't, but very soon will is interesting. Although they do plan to try and sneak ads in, I don't think will work out initially. Instagram is at its peak really. Facebook can keep evolving, but Instagram there isn't much to do with it. It's basically fully developed and if you lose people, it will be hard to bring them back, and losing potential suppliers of profit isn't valuable outcome. Facebook has the money to support it for free, but the problem lies in if they do charge. They need to stay competitive and their main hook is being free. There are a lot of other picture social media sites out there that would love the take the #1 spot, but Instagram needs it to stay afloat.
ReplyDeleteI believe that if Instagram were to add a price to it, the next big thing would surely rise out of the dust. People these days are so concerned with money and if anything is free, they'll take it. Now, there are certainly many teenagers and quite possibly many adults as well that think to themselves, "oh what's one dollar?" and they just go ahead and buy the upgrade or the new app. On the flip side again, seeing as though there are many millions of people on this one app alone, there would be well into the millions of people who stop using it if it costs money or they just wouldn't get the upgraded app. Social trends don't last that long and seeing how Instagram has already been around for a few years, I think they would only be doing themselves a disservice in creating a price for the app and would only bring them to go down in profit even more.
ReplyDeleteOn your point about adding a small fee to the app I disagree that that will cause no problems. Some people may not like the extra fee and may decide not to use Instagram anymore. However I do agree that Insatgram should find some way to make money to account for their marginal cost. In addition it is pointless to run a one billion dollar app and make no money. I also enjoyed your graph. I think it made your argument stronger in showing the rising number of consumers using the app.
ReplyDeleteI really liked how you picked a topic that basically everyone can relate to! Although I use Instagram on a daily basis and would prefer it to stay free, I wouldn't mind paying a small subscription fee if it was required. I believe that, that statement is true for most Instagram users. Who knows, maybe with a small fee the creators of Instagram will keep enhancing the app even more. I personally don't believe that adding a few advertisements and having a small subscription fee will turn away many users. A company can only go so long without making a profit.
ReplyDeleteI find it really interesting that a company would spend excessive time and money developing an app that does not even profit for the first several years, and has no possible means of advertising. If employees always acted according to economic principles and strict cost-benefit analysis, this app probably wouldn't exist. I saw the same story about Snapchat a few months ago, so this seems to be a theme with app designers.
ReplyDeleteOne more thing; I think you are misusing positive and negative externalities. These are factors which provide a cost or benefit to one group of people without effecting the actual makers of the product. The fact that the company makes no revenue and the possibility that consumers may have to pay for the app are certainly negative, but wouldn't be considered externalities because they effect both the producer and the consumer.
It's surprising to see that they still haven't managed to make a profit from how popular the app is, as well as it being bought by Facebook. I think that the best way for them to turn a profit without loosing popularity would be to add adds to the app. I think that raising the price of the app would do little because the majority of people already have it downloaded and wouldn't have to pay any money.
ReplyDeleteAs a user myself, I can say that it is an app that certainly is popular and is fun to use. With so much attention and demand I am surprised that Instagram/facebook wouldn't make any alterations to the app to make some sort of substantial revenue. I think that Instagram should have two similar apps, Instagram(1) would be free and Instagram(2) would cost a dollar to two dollars. Instagram(2), would be able to do everything Intagram(1) can do, but plus more features; features that make the marginal benefit worth the marginal cost. Also, the users between the two apps would still be able to communicate. Overall, this is how instagram/facebook should make profit and not that high of a cost without losing users.
ReplyDeleteI guess I never realized that such a popular app was not making any profit, but it makes complete sense as to why they are not. I believe that this is a really tricky balancing act between the MB and MC. As the demand for this app decreases as advertisement occurs the nearest substitute will arise and the consumers will just switch to that. I do think there is a happy medium... figuring out what this is though will be difficult. This was really interesting though!
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