Where will Facebook’s growth come from? Instagram

Pew Research reports that Facebook is far from the dominant social platform for teens. However, Facebook-owned Instagram holds the number 2 spot after YouTube. Now reportedly valued at over $100 billion, Instagram will drive growth for Facebook through new users as well as new advertising revenue. But how?

During its most recent earnings call, Facebook remarked it still had an untapped business opportunity with Instagram. The photo-sharing social app has 25 million business listings, but only 2 million monthly active advertisers. Facebook believes that this gap between the number of businesses present versus those that use the app for advertising showcases the potential for growth.

We (Reveal Mobile) recently conducted a survey of over 200 owners and managers of small to medium-sized businesses (SMBs) in the United States to understand what’s driving brands, retailers and agencies to advertise on Instagram — or not. The early analysis points toward how Facebook will continue its growth through Instagram.

SMBs adopting Instagram

The first result that surprised us was the amount of small to medium-sized businesses advertising on Instagram today, with 34.6 percent actively allocating ad spend there currently. We expected to see a smaller number from our survey audience.

Of the 65.4 percent of SMBs that don’t advertise on Instagram, most cited that they don’t advertise at all, with 19.5 percent believing that it’s not a fit for their business.

For Facebook to successfully meet its market share growth goals, it needs to understand why companies choose not to advertise on Instagram today. Its biggest hurdles will be convincing brands that don’t advertise to invest in advertising and making the ads appropriate for businesses who believe the app is not a good fit. Facebook also has the opportunity to convert those who haven’t yet tried running campaigns (18 percent) to becoming paying advertisers.

Why is the platform so successful?

Our results also showed us the two primary reasons companies advertise on Instagram today: ease of use and excellent targeting capabilities. The app makes it very simple for advertisers to boost engaging posts, align their desired outcomes to the campaign and find the right audience.

When it works correctly, the results are impressive. The comments on this campaign by Territory Run Co. are not uncommon, where the audience expresses their happiness about receiving a campaign they feel is just right for them.

SMBs also show growing comfort with using sophisticated tactics for finding their target audience. The majority of advertisers use geotargeting on at least half of their campaigns, with some stating they use it on every campaign. They also view “custom audiences” as a strategic asset, with over 77 percent using a custom audience, built from their own customer data or third-party data sources, on at least half of their campaigns. A whopping 29 percent of SMB advertisers use them on every campaign.

As more people begin to use Instagram, and as more advertisers shift their digital spend there, Instagram will likely represent Facebook’s best growth opportunity. The $1 billion purchase price that Facebook paid for Instagram in 2012 now seems like a bet that will pay off.