Why Facebook's Doubling Down on E-Commerce

E-commerce sales are booming, and Facebook (NASDAQ: FB) wants a piece of the action. The social media giant has been moving toward making shopping on its platforms, Facebook and Instagram, easier since last year. It recently launched and expanded a few products that aim to make its apps shopping destinations, particularly for small businesses.

Screenshots of Facebook Shops on smartphones

Image source: Facebook.

Another new tab on Facebook

Facebook Shop is a new tab coming to the Facebook app that'll allow users to discover businesses and products on the social media platform. It's a clone of Instagram Shop, which the company started rolling out last month.

Both the Facebook and Instagram tabs build on the Facebook Shops feature Facebook introduced in May. Shops allows any retailer to easily upload a product catalog and begin selling through Facebook quickly. Customers can pay through Facebook Pay, and their payment credentials will be carried over from one Facebook app to another.

Creating a dedicated tab in Facebook for shopping could accelerate adoption of Shops. Most businesses have a larger and more established presence on Facebook versus Instagram. Facebook has over 180 million businesses globally on its flagship platform (although Shop is currently only available in the U.S.). The company hasn't provided an update on the number of Instagram business profiles in some time, but it had 25 million in late 2017.

Facebook plans to charge a selling fee, but it's waiving the fee through the end of the year. It also doesn't charge to set up a Store on its platform. It offers a free customer messaging system through Instagram Direct, Messenger, and WhatsApp. Facebook also offers store owners free insights and measurement statistics for their stores.

How does Facebook expect to make money?

Providing the infrastructure for small businesses to easily sell their goods online is big business. Shopify (NYSE: SHOP) was growing quickly before the coronavirus pandemic hit, and it saw a big spike in adoption of its platform as the virus spread around the world and retailers looked for ways to move their businesses online. But it's not giving away its service for free.

Facebook isn't trying to compete with Shopify. In fact, it views the company as a partner. Merchants can import their Shopify product catalogs to Shops with just a click. Additionally, Shopify merchants won't need to use the Facebook Commerce Manager as a backend for their Facebook Shop if they don't want.

While Facebook will eventually charge a fee every time a Store makes a sale, that revenue stream might not be as valuable to Facebook as the potential for incremental ad revenue. 

Facebook Shops, combined with Facebook Pay and Instagram Checkout, which allows shoppers to pay for items without leaving the app, ought to lead to higher conversion rates for people who click on ads. And Facebook will be able to provide better measurement statistics for merchants. All of those lead to more value for advertisers, which means higher ad prices.

E-commerce ads are already becoming more important for Facebook. While many big brand retailers have boycotted advertising on Facebook, smaller merchants and direct-response advertisers (as opposed to brand advertisers) have more than made up for the pullback in ad spend. Offering more value to those advertisers is exactly the right move for Facebook, as that's its stickiest source of revenue.

Facebook Shop and the other updates Facebook's made to its e-commerce features puts Facebook one step closer to becoming an online shopping mall. And that presents a massive opportunity for growth for the tech giant.

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Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool's board of directors. Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook and Shopify. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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