Instagram is turning the screws on Snapchat by handing advertisers free trials and credits (SNAP, FB)

Instagram is luring advertisers to its platform by giving them free trials and credits.
While credits and trials are not unheard of, advertising executives say Instagram is using them at an opportune time to strike Snap at its weakest.
Advertisers are questioning the efficacy of their ad spending with Snap, and Wall Street is starting to question the company's ability to deliver on the lofty growth targets baked in to the company's stock price.

Instagram appears to be turning the screws on Snapchat, luring marketers and advertisers by offering them a chance to test new ad products free.

Morgan Stanley — the lead underwriter on Snap's initial public offering — released a bombshell note on the company this week, downgrading the company and lowering its stock price target by 42% to $16. But that wasn't it. The note also may have lifted the lid off of one of Instagram's tactics as it takes on Snapchat.

The analysts detailed Snap's woes and put the blame squarely on Instagram, calling it "likely to be more disruptive than previously expected."

They also said that Instagram was "giving advertisers sponsored lenses for free." Instagram launched its version of lenses, called face filters, in May.

Business Insider spoke with six advertising executives about Instagram's strategy, and while they were unable to confirm that free trials were being offered for sponsored lenses, they said Instagram regularly looked to incentivize advertisers to spend more on the platform by offering them free chances to test new ad products or credits to cover production costs.

In other words, Instagram is attempting to restrict Snapchat's growth not only by mimicking its core features at a rapid clip but also by luring advertisers to run ads on its platform with free trials, credits, and discounts. Instagram declined to comment for this story.

The aggressive move by Snap's chief rival comes at a delicate time for the newly listed social-media company. Advertisers are questioning the efficacy of their ad spending with Snap, and Wall Street is starting to question the company's ability to deliver on the lofty growth targets baked in to the company's stock price. The move also heightens fears that Facebook, Instagram's parent, will be able to blow Snap out of the water. It has deep pockets and a $460 billion market capitalization. Snap, in contrast, is now valued at $16.4 billion.

Tom Buontempo, the president at the social-media marketing agency Attention, told Business Insider that Instagram saw this as a window to strike.

"This, at a time when daily active users on Snapchat are inevitably slowing down and advertisers are questioning whether they need to include them in their marketing mix or if they can more efficiently reach their audiences elsewhere," he said.

The ad-agency executives told Business Insider that Instagram provided trials and credits mostly while rolling out new ad units or tools it wanted brands to test. The nature of the incentives, and the values, tend to vary across brands and media agencies.

"We've received a few discounts and credits from Facebook and Instagram for a specific client that I work with," said a media buyer at global media agency who wished to remain anonymous. "Because our client is very much about testing and learning, we've been given credits for the opportunity to test a couple of new products and see how well they work for the client."

Another media buyer added that offering free trials was a product and sales strategy that Facebook and Instagram regularly employed, comparing them to "test-drives before you make the investment." Facebook and Instagram offer such trials both for new products and to get brands that haven't yet tried products to test them. One of the agency's retail clients tested Instagram Stories ads of various lengths at no charge just last month.

A third media buyer said Instagram and Facebook didn't always necessarily apply credits just toward ad inventory. They may instead apply credits toward the costs that come up while producing the ads for the platforms, for instance, or offer support with free customization.

When an auto brand wanted to test video ads on Instagram Stories and created an ad that needed to be resized, for instance, Instagram absorbed the additional cost of editing for the brand, according to the same media buyer. The brand spent $3,000 with a partner to get the video reformatted, which "magically appeared back on its account," the person said.

"This happens all the time," according to the person. "The idea is to get brands to try new formats out and hopefully get them to spend more eventually. The amount for our client was written off almost instantaneously."

To be sure, platforms offering buyers such incentives is hardly unprecedented. Google used to have its own incentive program to motivate US advertisers to buy more before rebates got a bad rap, and Twitter is known to target ad agencies to get them to advertise on the platform. Snapchat too, under tremendous pressure to show good results in the second quarter, recently gave advertisers bonuses, discounts, and media credits, as Digiday reported.

According to Bryan Wiener, the executive chairman at the agency 360i, this is just Facebook's "standard operating procedure."

"They run beta tests with a select group of premium advertisers all the time," he said.

But the timing of Instagram's incentive program is conspicuous, industry insiders said. The move comes at a time when Snapchat is already struggling, despite opening new advertising channels and releasing new features for users. Its growth has been a concern for investors and advertisers alike. Several banks have recently cut their price targets on its stock, which has been sliding.

"It's a conscious effort timed with Snap's troubles, and they are doing everything in their power to not simply show that they're an alternative, but that they're in fact better," the person with the retail client said. "They have gotten very bullish in their strategy, at a time when Snapchat cannot afford to give away even a cup of coffee."