As a business owner, you need to be frugal - now more than ever. Adapting your business to market trends can give you a leg up on your competition, but proper research is key to understanding potential risks to your business before you decide to go all-in on the latest ecommerce trends.
Taking the time to read the fine print can help protect your bottom line when you invest in a new sales channel. Tools like Instagram Shop and Facebook Pay can expand the reach of your product lines to a large market, but at what cost?
As of 2020, Instagram has a user base of over 1 billion, with 130 million of those users engaging with the newly added shopping tags. With such a large number of users, it makes sense for your business to want to share your content and products on the social platform. With Instagram’s recently released Shop feature, users can now scroll through the platform discovering and purchasing from new businesses - all without leaving the app.
If this all sounds like a little too good to be true, hold up a second before you divert all of your energy to Instagram. The pot may not be all that sweet for some, as Instagram Shop and Facebook Pay’s associated fees can be a hard pill to swallow. Larger retailers like H&M, Adidas, Michael Kors, and others might not mind the 5% payment processing fee - per shipment, or the flat-fee of $0.40 (USD) on transactions lower than $8.00 (USD), but these transaction fees can make a substantial dent in a small retailer's bottom line.
An example Facebook has provided regarding these shipping fees mentions, “...If the first shipment is $10.00 (USD), we’ll deduct $0.50 (USD) for the selling fee. If the second shipment is $6.00 (USD), we’ll deduct $0.40 (USD) for the flat fee… - You keep the rest of your earnings.”
If your retail business has an average transaction amount of $152.11, your business will end up paying $7.61 per transaction in just Instagram Shop/Facebook Pay fees. This fee is significantly higher than what most payment processors charge, including flat-rate payment processors who have traditionally had higher costs per transaction than their industry peers.
Beyond the per-transaction fees associated with doing business on these social media platforms, be aware that additional fees such as chargeback fees will still apply... Facebook’s chargeback policy is something you may easily overlook, if a merchant loses a chargeback dispute with a customer, the original transaction amount is returned to the customer, as well as, a $20.00 (USD) chargeback fee will be withdrawn from the merchant's account. Just because they are not a traditional merchant account provider, Facebook is still applying fees that are common to the payments industry.
Service fees may not be the only downfall of doing business on Instagram Shop and Facebook Pay, your business’s website traffic and customer information may also take a hit. Since social media users no longer need to leave the platform to purchase your products, your webpage traffic may see a sharp reduction, and in turn, reduce subscriptions to your mailing list and ability to contact potential customers - which has a direct correlation to repeat sales and brand engagement. Unfortunately, for small retailers tools of customer convenience may come at a higher cost, with impacts across their revenue base, web traffic, and customer contact information.
The biggest risk to relying on a third-party platform for your sales and business traffic is that you’re at the mercy of their algorithm changes to keep your posts showing up for customers. There is also a risk that your account may be deleted, hacked, or otherwise lost. While this is by far the worst-case scenario, it has happened to many prominent influencers on the platform, and if you do not have a way to contact and communicate with customers outside of the platform you will be left with very few options for recourse.
Ultimately, the time to move your retail products to social media, and how much you want to rely on a third-party platform for your sales is entirely up to you. As Instagram Shop and Facebook Pay become more widely accepted and implemented across other small businesses and retailers, the costs associated with using such platforms may decrease. Businesses are always finding new ways to put products in front of consumers, but what dictates where we go next is wherever your customers are paying attention.
Tools like the ones mentioned above can provide an exciting bump in your sales and a way to get your brand in front of a new audience. But they are no replacement for the security and stability of a traditional payment processor integrated through a sales channel you own (such as your website) that provides direct customer relationships that can’t be replicated by Instagram Shop or Facebook Pay.
Happy selling and stay safe.