Advertisers have been able to run ads on Instagram for about a month now, after the Facebook (NASDAQ:FB) company opened its ads API to third parties. I've hypothesized in the past that Instagram ads could be worth more than Facebook ads, and the early results indicate that's indeed the case.
Salesforce was one of the launch partners for Instagram's ads API, and it published aggregate results for the first two weeks of publishing ads to Instagram. It found the average price per ad impression was 90% higher than on Facebook, coming in at $6.29 per thousand impressions.
Let's take a look at the main factors leading to these higher ad prices, and whether investors can expect Instagram to maintain its premium pricing.
These ads get clicks
Perhaps the biggest factor driving up the average ad price on Instagram is the fact that users are clicking on these new ads. Overall, Salesforce saw a 1.5% click-through rate on the average Instagram ad its customers bought through Social.com. Comparatively, it recorded an average click-through rate of just 0.84% during the first quarter for Facebook ads.
Naturally, higher conversions lead to higher ad prices on a per-impression basis. If you look at the cost-per-click on Instagram and Facebook, they're much closer. The cost-per-click for an Instagram ad is about $0.42, just $0.02 higher than Facebook ads.
With Instagram's new ad units focusing on direct-response campaigns like app-installs and website visits, advertisers ought to be inclined to continue paying as long as conversions stay high. Brand advertisers may look elsewhere, however, as direct advertisers bid up ad prices.
Factors behind higher clicks
It's important to understand why users are clicking on these ads at a higher rate than Facebook ads in order to determine whether the rate is sustainable.
One important factor behind the higher click-through rate is that Instagram only has one ad unit -- a big image with a call-to-action button. Facebook, comparatively, has News Feed ads that offer similar capabilities as well as right-hand column ads on desktop. The company readily admits that right-hand column ads are lower priced -- indicating they don't convert as well. Even Facebook's News Feed ads don't occupy as much screen real estate as Instagram's ads, which likely factors into the conversion difference even more.
Another potential reason for the higher click-through rates is the novelty of the feature. Users are apt to see what these new direct-response ads are all about by clicking on them. This clearly is an unsustainable advantage, and it's impossible to measure.
It's important to note, however, that ads on Instagram aren't completely new. They've been around nearly two years, so users are used to seeing sponsored posts to a certain degree.
Other factors behind higher ad prices
Another factor that leads to higher ad prices on Instagram is the fact that its audience skews younger compared to Facebook. Teens continue to flock to Instagram with a growing plurality, considering it the most important social network. This younger audience often demands higher average ad prices across all media types.
Additionally, Instagram only launched its ads in certain geographies: the U.S., Canada, the U.K., France, Germany, and Australia. These markets generally garner higher-than-average ad prices compared to the rest of the world. Indeed, Facebook's average ad revenue per user in the U.S. and Canada is 3.3 times higher than the global average, while its results in Europe were still 22% higher than average. As Instagram expands its ad business globally, it will likely see its average ad price decline.
So, is Instagram really worth more?
The value of a digital ad really comes down to one factor: How well does it convert into sales? With Instagram's audience skewing younger compared to Facebook's, an average conversion on Instagram is likely worth more in future sales than an average conversion on Facebook. As such, investors should expect the cost-per-click to remain slightly higher on Instagram compared to Facebook, even as it expands globally.
However, the rate at which Instagram ads convert may decline as the novelty of the ads wear off, or other geographic markets respond differently. Still, since the ad units take up the entire screen, it's likely Instagram ads will still convert at least somewhat better than Facebook's.
There's one final factor that isn't in play yet. While advertisers are able to use Facebook's personality and demographic data to target users, they can't use data from Instagram. Instagram's social graph is arguably more valuable for determining users' interests -- especially with regard to what they actually want to see on Instagram. If Instagram enables advertisers to target users with its own interest data, it could give another boost to its conversions, and thus ad prices.
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Adam Levy has no position in any stocks mentioned. The Motley Fool owns and recommends FB. The Motley Fool recommends CRM. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.