Last year, Foursquare was said to be on the verge of bankruptcy, unable to turn its social media star into a sustainable business. Since then, however, the startup has raised a $41 million round of financing; reportedly garnered equity interest from Microsoft and American Express; and made significant improvements to its mobile products. Now, the company is taking one of its biggest strides yet toward silencing its critics.
Today, Foursquare announced that it's opening up its advertising platform to its fast-growing database of small businesses. The service, which allows users to check in to locations via smartphone, has transitioned into a promising search and discovery platform, on which ads are beginning to play a more prominent role in attracting potential customers to venues. Foursquare has been testing its ad product for months with select partners, but now it's finally giving its 1.5 million merchants access to the service—a move that could generate substantial revenues for the company.
According to Foursquare chief revenue officer Steven Rosenblatt, the program is unique because it will help to close the loop for merchants. Whereas before, a small business might not have been able to determine the results of advertising on the web or through traditional media, Rosenblatt says Foursquare's location-based approach to mobile makes the service more effective and transparent. "[Merchants] are so confused in the market as to what they're actually getting: Are ads actually driving customers? We'll take all the guesswork out," he says. "It's pretty simple: People see an ad when they're by your business, and it drives them into the store. They're seeing real customers—real ROI."
Small businesses can create ads using Foursquare's business tools. They can target relevant customers; set a monthly budget for ad spend; and track ad performance on the service. A burger joint, for example, might want to promote its menu during a consistently slow lunch day. When a Foursquare user opens the service during lunchtime, he or she might see, say, a promoted suggestion for that nearby burger spot on the app—an ad that might attract attention because the restaurant is offering a special ("spend $20 and get $5 off!") or highlighting popular user tips. ("The blue cheese burger is delicious!").
Success will be calculated on a per-action basis: how many clicks it drove, how many check-ins it delivered. Merchants will be able to tell not only how many potential customers viewed their ads, but also how many actually set foot in their doors because of them—provided users check in or redeem a special there—and at what cost. "A coffee shop may feel comfortable spending $50 to $200 a month because of its margins, whereas a high-end restaurant in New York City may want to spend $300 to $500 a month," Rosenblatt says. "It depends on the business. Maybe I'm willing to spend $1.50 to drive a customer in, while a more expensive place might be willing to spend $5."
It's a model that Foursquare CEO Dennis Crowley has long dreamed of implementing. As we wrote in our recent, extensive profile of Crowley:
The biggest near-term revenue will likely come from the 1.4 million local merchants on the platform. The company plans to start charging them for its ad products on a cost-per-action basis later this year, which could prove a boon to its bottom line. "Maybe you're slow during the day, so when people search for a lunch spot, you run an ad in the neighborhood for your rotisserie chicken salad. Say we showed the ad a hundred times and six people showed up within the next three hours—that's a pretty good conversation rate," Crowley says. "So maybe we pick up $200 per month from that venue. Take that from 10% to 20% of our million venues, and that's $20 million to $40 million a year."
Crowley's math isn't outside the realm of possibility. Later that month, when I press Foursquare investor Ben Horowitz about the startup's meager $2 million haul in 2012, he tells me the company has already exceeded last year's revenue by roughly four times. A back-of-the-envelope calculation indicates Foursquare is thus on track to take in around $15 million to $20 million in 2013—and the revenue growth could speed up as the company begins to charge more merchants and roll out more ad products.
Though Foursquare still has a long way to go before reaching its potential, Rosenblatt says the company is growing its sales team and will do outreach to get more of its merchants advertising on the platform. The company also faces increased competition from larger, more established competitors in the space, such as Yelp.
But Rosenblatt cites one particularly promising statistic: "On average, we're seeing [merchant ad pending range] anywhere from, depending on the category, $200 to $500 per month," he says.
That's a figure that might even have surprised Crowley.