- Facebook has struck a deal with ecommerce company Shopify to make its Buy Button available to Shopify merchants
- Facebook has lately taken a divergent approach regarding doing ecommerce on its site by letting third-party merchants sell on the site as opposed to Facebook trying to sell directly
- This approach is designed to increase user engagement on the site and appears poised to become a success
Leading social media company Facebook (NASDAQ:FB) recently struck a game-changing deal with ecommerce company Shopify (NYSE:SHOP) to make Facebook’s ‘‘Buy Button’’ available to Shopify’s merchants through an ad integration deal. The deal has sent Shopify shares soaring more than 30%. Facebook launched Buy Button 11 months ago to enable people to buy from the ecommerce site without leaving Facebook’s app. Though the feature received many positive reviews from analysts, Facebook limited its availability to just a few merchants. But with the Shopify deal, Buy Button will now be available to Shopify’s 162,000 merchants, or roughly 1.7% of total ecommerce merchants.
But, why is this new deal any different from other failed ecommerce initiatives by Facebook?
Facebook Stock Analysis: eCommerce Flops
For a number of years, Facebook has experimented with various ecommerce initiatives, many of which have failed to take off. The company first tested the waters with Gift Stores that allowed people to buy gifts directly from Facebook and send them to their friends. Launched in 2012, Gift Stores was a flop. TechCrunch estimates that only 0.4% of FB users ever used the platform, and that Gift Stores brought in a measly $10 million for FB in annual revenue, hardly enough to move the needle for a company of its size.
Facebook then launched Autofill Payments for Android devices. The feature is designed to automatically fill in payment information from Facebook’s cache of stored data when people buy products from mobile apps. Its main attraction is that it makes the checkout process easier and thus encourages people to complete the shopping process. The feature sounds like a good idea considering that shopping cart abandonment for mobile purchases is reported to be north of 90%, with difficult checkouts carrying the blame for the trend. Autofill Payments is, however, only available for select number of users and companies, and has never gone mainstream. And, it’s hard to see how the feature would have directly benefitted Facebook other than the commissions the company would get from merchants who integrate it in their payment gateways.
Facebook: A Walled Garden
Buy Button, however, seems to be the perfect ecommerce solution FB has been searching for. Instead of Facebook trying to sell stuff directly to people, Buy Button allows retailers to sell their products on Facebook. Buy Button will be showing up on Facebook Page Posts as well as on Promoted Posts that are run by Shopify merchants thus allowing them to share them organically or even pay if they need to gain more reach. Instead of people clicking through to the retailer’s website, the feature will initiate a checkout on Facebook’s News Feeds. People will then be buying instantly using payment details already stored on Facebook after which they can return to Facebooking.
Buy Button is one of the features Facebook has lately devised to keep people bouncing around its walled garden without leaving the app. And, Buy Button is likely to enjoy rapid adoption since it’s free to use. Other features that serve this purpose include Instant Articles which the company launched in May; Nearby Places, and Messenger apps. The main theme here is to keep Facebook users inside its app as long as possible. Higher user engagement is good for any Internet site, but more so for a social media company like Facebook because it helps the company to learn more about its users. The more relevant information Facebook garners about its users, the more it can glean information about them and use it to target them with the right kind of ads. The company recently struck a deal with IBM (NYSE: IBM) to use IBM’s deep expertise in business analytics to target FB users with more relevant ads.
Facebook has been using a double-pronged approach when it comes to ads. The company has been using the main Facebook app to display high quality ads that fetch higher CPM rates from publishers. This avoids cluttering Facebook with too many ads. This way, Facebook was able to jack up CPM rates by 285% during the last quarter. Facebook then uses Instagram to display run-of-the-mill ads at a much higher volume but lower CPM rates.
The fact that Facebook is ramping up its Buy Button by making it available to Shopify merchants tells you that the experiment is working well. The feature is designed to increase user engagement, though Facebook might decide to monetize it directly in the future. Buy Button appears destined to become one of Facebook’s notable ecommerce successes.
Note: You may also be interested in our Facebook stock Analysis Video.