Foursquare has traditionally been a way for customers to promote their favorite bars, coffee shops and restaurants. Now, those shops will be able to promote themselves to consumers.

The four-year-old mobile app company has started allowing a "handful" of local New York City merchants to promote their store listings within the service, meaning they will be able to target Foursquare users in the vicinity. Until recently, promoted listings were limited to large national merchants such as KFC and Radioshack.

It's the first time Foursquare has generated revenue from small businesses and a foray into the fast-growing local mobile ad market, estimated at $1.2 billion in 2012 according to BIA/Kelsey.

To date, small businesses on Foursquare have only been able to advertise by offering discounts to a user after he or she checked-in to that location. Some merchants can now lure in nearby consumers by promoting a photo of a dish, a glowing review left by a Foursquare user or just their listing.

The several merchants currently working with Foursquare are targeting Foursquare users based upon their locations and check-in histories. Merchants can target nearby consumers with particular tastes -- a predilection for fine dining, for example -- or ones who previously checked-in to their store. The promoted listings can appear in a user's recommendations -- the listings on the app homepage -- or in the "Explore nearby" section.

Foursquare CRO Steven Rosenblatt said the initiative is currently only available to "a small select group of people here in New York City" because Foursquare wants to ensure it and its small business partners know how to most-effectively use the developing service before the functionality becomes widely available later this summer.

The staggered rollout is partially an attempt to allay merchants' fears of digital marketing. A recent Boston Consulting Group survey found small businesses spend only 3% of their marketing budgets on digital, 12 percentage points lower than the national average. Local merchants are similarly wary of daily deals services like Groupon and LivingSocial, which have a mixed record of helping small businesses.

"This is not daily deals," Mr. Rosenblatt said. "The vast majority of businesses, the daily deal was not beneficial for them."

Merchants can turn on and off their Foursquare promotions at will and will only be charged on a "per action" basis (fees are accrued when a user taps on a promoted listing as opposed to merely viewing it). Foursquare typically charges $0.50 to $3 per action, but that may differ for local merchants.

"Small business are willing to pay for local advertising if it makes sense," Mr. Rosenblatt said.

Extending this capability to local small business owners is "phase two" of Foursquare's monetization strategy, a Foursquare spokesman said. The new offering and revenue stream comes amid questions about Foursquare's ability to generate enough revenue to justify a valuation that was once reported to be as high as $760 million.

Foursquare is also developing a third revenue stream: an advertising product that would allow marketers to use its troves of data to target consumer segments on other services. Several digital agencies have already been pitched on the idea which will likely go live in the coming months.

Gerardo Perez, co-owner of Agozar in New York CIty, has been paying to promote his Cuban restaurant on Foursquare for several weeks now.

"It seems to be working pretty well," he said. "I believe its giving us more exposure and visibility than before."