The Curious Case of Foursquare

 

Recently, I heard that there is a location based social networking site called Foursquare that has been valued at $125 million. My first reaction was that of hype getting build around yet another social media site. It is yet to get million users let alone the revenues. After a lot of initial inertia, I managed to create an account on Foursquare and in the process learnt a few things about it.

What is Foursquare’s Business Model?

The business model of the site is crowd-sourcing of geo-location  data with information around the location. This model allows the company to collect hyper local data which can have potential value to advertisers. The revenue model is based on location-based marketing services which is a multi-billion dollar opportunity.

Foursquare pioneered the concept of “Check-in” which is a voluntary feature where users who want to share their location check-in using their mobile phones. The service then intimates the friends of the users, recommends things to do in the area, and awards points and badges to the users for their activity. It also lets the user recommend things other people should do and track what the user has done himself. Users earn points, win Mayorships and unlock badges for trying new places and revisiting old favorites. The awards and rewards act as incentive for the users to disclose their locations.

Foursquare gives opportunity to small business to benefit from the location of a potential buyer. A bar can run promotions not only when a person checks into the bar for the first time but also when the person checks in after a certain number of times. For example, Dorado Tacos & Cemitas (Brookline, MA) gives free Ensenada fish taco on your 5th check-in!. Similarly Broken Record (San Francisco, CA) offers 50% your first beer when you check in on Foursquare. This is hyper local to the core. These offers give incentive for the users to check-in their location. There are a few offers for the mayor (person with maximum check-ins in a location in last 60 days) like Dogpatch Labs New York (New York, NY) offers unlimited Coke Zero for all mayors other than Joe Essenfeld (Now who is Joe? I have no clue it was mentioned this way on Foursquare business page). Foursquare has created stickers to help the small businesses with marketing creative.

In December last year, Pepsi joined hands with Foursquare as part of its Refresh Everything Community program. For every Check-in in New York, Pepsi donated 4 cents to inner-city youth center camp interactive. Within one week, New Yorkers earner $10,000 for the organization. This small pilot got Pepsi excited on the enormous possibilities on location based promotions.

How successful will Foursquare be?

The chances of Foursquare becoming a successful venture are bright but it would have to overcome a lot of obstacles:

  • Ubiquitous Appeal – The services offered by Foursquare would appeal to a city/metro person rather than a small town person as the small towns do not have enough locations or businesses offering promotions. Foursquare would find it difficult to scale the services in emerging markets.
  • High Attrition Rate – The service suffers from high attrition rate just like Twitter. Many would start to use the Check-in and get excited by the promotions and discounts but the initial euphoria about the service may wear off very fast. The users who do not travel much are likely to churn faster than others.
  • Limited Services – The current business model of Foursquare relies on the user Check-ins and recommendations. The company would need to look for other interesting uses (just like Twitter) to sustain the interest.
  • Competition from other Social Networking Players- Nothing stops Facebook and Twitter from offering similar hyper local information and promotions to their users. In fact both Facebook and Twitter have similar aspirations and since they are established players, it would be easy for them to roll the location services faster

Why is the valuation so high?

The world is placing bets on success of “Hyper Local” and not necessarily on Foursquare as a company. Foursquare just happens to be company that is ahead of others in terms of its execution. The high valuation is due to the hopes of its acquisition by an internet major like Google or Yahoo. Yahoo offered $125 million but its bid has been rejected by the Foursquare management. Local ads is largely an under served market with a huge potential (numbers as high as $10 billion have been quoted). If any company is able to get a fraction of the potential, the valuation is bound to skyrocket. Foursquare has been tipped as the next big thing after Twitter with a potential to eclipse Twitter. Now that Twitter has been valued as $1 billion company, Foursquare has raised its expectations. However, the management needs to be careful while evaluating the bids as any misstep may see valuations tumbling and sometimes there is a limit to which the valuation can be stretched without the support of a big brand.

Interesting video on Social Location from Kevin Rose

 

Related Posts: