How could Pinterest be valued at $5 billion if it has so little revenue? That’s the question many incredulous journalists are asking after news yesterday that the “scrapbooking” site had raised another $200 million, bring its total funding to $764 million.
The site only recently launched its first ad units, promoted pins. However the company is asking for and reportedly getting commitments of $1 and $2 million with CPMs of $30 to $40.
One of the likely uses of the new funding is for continued international expansion. The company has offices in Europe and Japan, but is customized for users in more than 30 countries.
What makes Pinterest so valuable? There are two principal answers: women and mindset of its users (who are mostly women).
Women dominate activity on Pinterest. That’s relevant and interesting because, in the US, women reportedly dictate (or substantially dictate) roughly 70 percent of all household spending. That purchasing power represents hundreds of billions of dollars annually.
Perhaps more interesting is the mindset of users. Whether by design or luck Pinterest has created a “culture” of behavior and activity that is arguably closest to search of all the social networks. Underscoring that, Pinterest recently introduced “guided search” to enable people to find things on the site more easily.
Typically Pinterest users are looking for ideas and inspiration (for home decorating, parties, clothes, gifts, travel). This behavior is “pre-purchase planning.” It’s “earlier in the funnel” than Google usage in some cases. That makes Pinterest a potential magnet for CPG and brand advertising.
But over time Pinterest will evolve (it already is) into a visual search engine. People will increasingly go to Pinterest to find products when they’re “ready to buy” or nearly so.
None of the other major social sites, not Facebook, Instagram, Snapchat, Tumblr, LinkedIn or Twitter, feature this same “commercial intent” user behavior. Why this matters is because, if done right, Pinterest can be extremely successful with advertising. It offers both “awareness” and “directional” or “direct response” style advertising opportunities.
On other social sites ads are often “interruptive” or a distraction. Native ads can often be “deceptive.” They try to appear to be editorial so you engage with them. The best native ads offer something of value (i.e., content), the worst are a kind of “bait and switch” experience.
Native ads or promoted pins on Pinterest can be entirely relevant or consistent with what people are already seeking (e.g., products, design ideas). In this way they can operate like Google AdWords: relevant content that’s aligned with the user’s commercial intent or objective.
This is why Pinterest is so potentially valuable, although not yet fully proven as a commercial platform. And it’s also why the company is probably headed toward an IPO.
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