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The purchase of Instagram by Facebook for one billion dollars is no doubt a seminal moment in the history of Silicon Valley. It either signifies the peak of an incredible bubble of irrational exuberance, or affirmation of the massive economic impact of the latest wave of Internet and mobile start-ups. Either way, one thing is certain: had Instagram come to PPC Associates with either wads of money or stacks of stock options, I wouldn’t have accepted them as a client.
There are three reasons that would have led me to reject them:
1) SEM would have failed miserably for Instagram. As I’ve noted before, SEM doesn’t work well for new mousetraps, and a mobile photo-sharing app definitely qualifies as a new mousetrap. The volume of targeted searches would have been minimal at best, and searches with high volume would not have converted well (for examples, buying the keyword “photos”).
Mobile SEM targeted to iPhone users would have given us the best chance for success, but even there the volume of searches was minimal; the best term I could find using the Google AdWords keyword tool was “photo editing,” with 90,500 monthly iPhone searches in the US. “Photo app” only had 60,500 searches, followed by “Photo sharing” with 14,800. If you assume a 1% click-through rate (CTR) and a 10% conversion rate (CR) on these queries (which I think is more than fair for a mobile search campaign), you are talking about just 160 downloads a month. Even if we could have somehow increased this number by 10X to 1,600 downloads, that’s not enough for either Instagram or our agency to get excited.
2) Even Display and Facebook would be challenging. When SEM is unlikely to work for a client, we often recommend display banner ads or Facebook PPC; these mediums work better for new mousetraps, as they are great for “creating demand” rather than “fulfilling intent.” In Instagram’s case, the right display strategy would be to market the app on photo sites, app recommendation sites, and perhaps sites like Engadget for early tech adopters. Because Instagram was (until very recently) an iPhone-only app, we would have probably only served display ads to these users on their iPhones.
While the volume of impressions would likely have been much larger than that of the mobile search campaign described above, the CTR on display is almost always much lower than search. Because display campaigns are usually bought on a cost-per-thousand-impressions (CPM) basis, a low CTR would result in a high cost per click (CPC) and a high cost per acquisition (CPA). Given Instagram’s current lack of monetization, the predicted CPA would have probably been way too expensive for them to stomach (my guess: a minimum of $5 per download).
Facebook PPC would have likely been the best chance for success (and given the fact that Facebook acquired Instagram, I guess they might agree). Although Instagram is an iPhone app, its primary use-case is sharing cool pix with friends through Facebook (and other social media). There are two Facebook strategies that might have worked for Instagram: interest-based targeting (people who like photography, for example) and “sponsored stories” (friends of existing Instagram Facebook app users).
Alas, the fact that people ultimately use Instagram for sharing on Facebook doesn’t solve a major marketing problem – getting people to leave Facebook and download an iPhone app. Getting a user to sign up for a Facebook app on Facebook is very effective, as is getting a user to “like” an app or a Web site; getting users to do something off Facebook has been a challenge for most advertisers. My suspicion is the cost to acquire iPhone downloads from Facebook would have been too high to justify a sustainable campaign.
3) Without a revenue or profit model, my agency’s work would have been constantly subject to unfair scrutiny. Sean Marshall wrote a great post last week about what agencies look for in clients. Goal number one: set clear goals. I’m not saying that Instagram didn’t have acquisition goals and targets – for the record, I don’t have any info one way or the other – but when a business has no revenue or current revenue model, that’s a recipe for disaster from an agency perspective. Why? Because there’s no way to justify our existence as a “profit center” when there’s no revenue coming in to offset the cost of our services and marketing spend.
More often than not, this leads to guesstimates of appropriate CPA (or cost per install – CPI) targets. The agency then works hard to hit the targets, only to have those targets adjusted dramatically by a nervous management team getting pressure from the board. Ultimately, this game of ‘move the goal posts’ results in the marketing program getting shut down; without reasonable expectations around revenue, marketing is just a “cost center” and thus the first thing to go when times are bad!
My ultimate conclusion about how a company like Instagram succeeds in growing market share is pretty consistent with Instagram’s path to success: virality and social sharing. Instagram got acquired because it had 30 million users that were somehow perceived as a threat/opportunity to Facebook. Had Instagram acquired these users through any of the online direct response mediums PPC Associates supports, it would have cost them at least $60-$100M, money that – until recently – the start-up did not have.
Instead, they created a good product and made it easy for people to share this product with friends. If you can make that strategy work, I guess you can make one billion dollars. If you can’t – and you have a product similar to Instagram – don’t come to me for help; neither of us will be happy with the results!
– David Rodnitzky, CEO