Beware the risks of online markets like Instagram Shop

Last Updated on July 19, 2023 by Labib Ahmad

Do your business' growth strategies involve taking advantage of social media platforms like Instagram and Facebook to start selling your products online? Read on to see if it's the right decision for your business.

Expanding your small business onto eCommerce platforms

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. A tool like Instagram Shop can expand the reach of your product lines to a large market, but at what cost? Taking the time to read the fine print can help protect your bottom line when you invest in a new sales channel.

Instagram Shop and Meta Pay

As of 2023, Instagram has a user base of about 2 billion, with more than 130 million of those users engaging with the newly added shopping tags. With Instagram's release of the Shop feature, users can now scroll through the platform, discovering and purchasing from new businesses, all without leaving the app.

Since Instagram is owned by Meta (formally known as Facebook), Meta Pay is the integrated payment processor for all of Meta's services, including but not limited to Instagram, Facebook, and WhatsApp.

With such a large number of active users and ease of integration, it makes financial sense for your business to increase sales and expand into the social platform to share your content and products. Or does it?

Understanding the costs

If this sounds too good to be true, hold up a second before you divert all of your energy to Instagram. Instagram Shop and Meta Pay's still have transactional fees all merchants are subject to. Meta recently waived its 5% selling fee and has now implemented a 2.9% processing fee for orders placed via Instagram and Facebook. However, if customers were to use the PayPal branded checkout, that fee shoots up to 3.49%.

Meta has provided their own example regarding these shipping fees; they state, "If the card total transaction cost is $10.00 USD (including the total sale price, any shipping fees and applicable taxes such as sales tax), we'll deduct $0.29 for the processing fee. Your payout will be $9.71 USD."

Conduct market research

The first step before anything is to ask yourself, "Do I need this for my business?" It is important to conduct market research, which includes researching target demographics, competitors, and market trends. Here's why that's important:

• Target demographics: Conduct research into the types of users a platform has and if those align with your target demographic. Suppose your business is catered towards a specific target audience, for example, a certain age group. Would it make sense to expand to a platform that isn't necessarily catered towards that same audience?

• Competitors: To stay relevant in the same landscape as your competitors, you need to stay up to date on their goals and practices in the industry. If your competitor has expanded to social media stores, you may need to do so as well to stay competitive in the same space.

• Market trends: Similar to researching competitors, staying up to date with the market is crucial. For instance, if the entire industry is embracing online marketplaces while your business lags behind, you risk missing out on potential customers and growth opportunities.

Additional considerations

Beyond the per-transaction fees associated with doing business on these online marketplaces, be aware that additional fees, such as chargeback fees, will still apply. Facebook's chargeback policy is something you may easily overlook. For example, if a merchant loses a chargeback dispute with a customer, the original transaction amount is returned to the customer, and a $20.00 (USD) chargeback fee is also withdrawn from the merchant's account.

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 significant reduction in traffic. This could also reduce subscriptions to your mailing list and your ability to contact potential customers, which directly correlates with repeat sales and brand engagement. Unfortunately, for small businesses, tools of customer convenience may come at a higher cost, with impacts across their revenue base, web traffic, and customer contact information.

Consider the risks

Entirely relying on a third-party platform like Instagram Shop for sales and business traffic carries a bigger risk: your bottom line becomes intertwined with the ever-changing algorithms. You are at the mercy of the algorithm to show your posts and products to your customers.

There is also the potential chance of your account being deleted, accessed without unauthorized access, or hacked. Although this is an extreme case, many notable influencers have fallen victim to such circumstances. Without alternative means to connect and communicate with customers beyond online marketplaces, you are again at the mercy of the platform and its ability to provide a stable service.

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 becomes 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.

TikTok - The new kid on the block

TikTok has recently introduced its very own TikTok Shop, which allows merchants and brands to sell their products to its massive user base. TikTok charges a 2.24% transaction fee on delivered orders, which is surprisingly in line with the industry standard for transaction fees from traditional payment providers. However, it's still important to remember the risks mentioned earlier about why switching your entire business to a social media platform might not be the best thing for your business.

Final thoughts

Online platforms 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 should not be a complete 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 Instagram Shop can't replicate. Happy selling, and stay safe!